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UnitedHealth (UNH) Beats on Q4 Earnings, Enrollment Grows

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UnitedHealth Group Inc. (UNH - Free Report) reported fourth-quarter 2016 earnings of $2.11 per share, beating the Zacks Consensus Estimate of $2.07. Earnings improved 50.7% year over year.

UnitedHealth has a tradition of guiding conservatively and then beating its own estimates to surprise investors. Since 2009, the company has surpassed expectations in 25 out of 28 reported quarters and the trend continued in the reported quarter. The stock gained 1.82% in the pre-market trading session and we expect continued outperformance to drive the stock higher.

The earnings beat came on the back of higher revenues. Strong results from the health services business Optum and increased membership contributed to the outperformance.    

For full-year 2016, operating earnings were $13.3 billion, up 20.5% year over year, or $8.05 per share, up 24.8% year over year. Earnings easily surpassed the Zacks Consensus Estimate of $8.01 and were above the company’s own guidance of ‘approximately $8’.

Behind the Headlines

UnitedHealth posted revenues of $47.5 billion compared with the Zacks Consensus Estimate of $46.8 billion. Also, revenues grew 9% year over year. The increase was an outcome of business expansion in both health care benefits and health care services.

The company reported medical care ratio of 80.8%, down 190 basis points year over year, attributable to improved core business performance and reduced individual market pressure.

Total operating cost came in at $44 billion, 6.9% higher year over year. The increase stemmed primarily from higher medical and operating costs.
Operating cost ratio of 15.7% increased 60 basis points year over year due to higher levels of investment.

Segment Performance

In the reported quarter, UnitedHealth’s health benefits segment – UnitedHealthcare – reported revenues of $37.9 billion, up 15.5% year over year. Earnings from operations increased 79% year over year to $1.7 billion.

Revenues from Optum improved 1.4% year over year to $22.2 billion, reflecting strong contribution from the subsegments – OptumHealth and OptumInsight – offset by a decline in OptumRx revenues. Earnings from operations surged 20% year over year to $1.8 billion. Continued focus on accelerating growth as well as improving margins and productivity through enhanced integration and business alignment led to the overall improvement of this segment.

Membership Enrollment

The company’s total medical membership at the end of the reported quarter was 48.59 million, up from 46.4 million in the year-ago quarter.

Capital Position

Cash and short-term investments at quarter end were $13.3 billion, up 2.8% from the 2015-end level.

Debt-to-total-capital ratio was 46.2% at the end of the fourth quarter, down 250 basis points year over year.

Fourth-quarter adjusted cash flows were $2.4 billion.

The company repurchased 1.2 million shares in the quarter.

Guidance Intact

UnitedHealth affirmed its 2017 guidance provided last month. It estimates revenues of $197 billion to $199 billion, net earnings of $8.75 to $9.05 per share, adjusted net earnings of $9.30 to $9.60 per share, and cash flows from operations of $11.5 billion to $12 billion.

Our Take     

UnitedHealth’s results reflect broad-based growth across its different business segments. Going forward, higher membership, a strong balance sheet and a niche market position are some of the other positives that UnitedHealth should benefit from. Also, the company’s planned exit from the unprofitable exchange business should shield it from losses.

UnitedHealth carries a Zakcks Rank #2 (Buy).

Other Stocks Worth Considering

Some other health maintenance organizations are Magellan Health Inc. , WellCare Health Plans, Inc. and Molina Healthcare, Inc. (MOH - Free Report) .  While WellCare and Magellan carry a Zacks Rank #1 (Strong Buy), Molina carries the same Zacks Rank as UnitedHealth. You can see the complete list of today’s Zacks #1 Rank stocks here.

WellCare Health, a provider of managed care services for government-sponsored health care programs, delivered a positive surprise in each of the last four quarters with an average beat of 40.01%.

Magellan Health beat earnings estimates in three of the past four quarters, the average being 42.6%.

Molina is expected to release fourth-quarter earnings on Feb 13, 2017. The company’s Rank #2 coupled with an Earnings ESP of +5.33% places it well for a positive earnings surprise.

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