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UnitedHealth on A.M.Best's Radar After Buyout Announcement

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Following the recent announcement by UnitedHealth Group Inc. (UNH - Free Report) to buy DaVita Medical Group — a unit of DaVita Inc. (DVA - Free Report) — the rating agency A.M.Best has sprung into action.

In fact, the credit ratings of UnitedHealth as well as its insurance and health maintenance organizations’ subsidiaries were kept intact by A.M.Best.

The acquisition to be made by the company’s unit — OptumCare — is expected to enhance the number of its outpatient facilities in California, Colorado, Florida, Nevada, New Mexico and Washington.  Also, the buyout would strengthen Optum’s geographic presence of its primary and specialty providers, and care delivery locations.

The latest deal is in sync with company’s goal of providing efficient care at affordable cost. UnitedHealth has also bought SurgicalCare and Advisory Board and seems to be on an acquisition spree in 2017.  

From the point of view of financial leverage, the rating agency notes that the deal is likely to be financed by a combination of cash and debt that might raise the leverage ratio. However, the same is expected to be brought down to more manageable levels of approximately 40%, on repaying debt.

UnitedHealth’s deleveraging action to bring its leverage ratio to nearly 40% level at the end of third-quarter 2017 from much higher levels in 2016 and 2015 raises A.M.Best’s optimism on the company’s debt management abilities.

In fact, the rating agency views favorably the company’s interest coverage ratio which stands at north of 10 times. Additionally, A.M.Best’s significant financial flexibility backed by its sizeable commercial paper program, parent company cash, subsidiary dividends and credit facility is commendable.

UnitedHealth is better placed than other companies in the same space with respect to access to unregulated earnings and cash flows from its Optum unit.

However, the company’s goodwill which exceeds 180%, remains a concern. This is because it puts pressure on UnitedHealth’s balance sheet. Yet, UnitedHealth has not undertaken any write down of goodwill and the recent acquisitions have added to the segment’s earnings.

In the past six months shares of UnitedHealth have gained 21%, higher than the industry's growth of 20%.

 

The company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks from the same space are Centene Corp. (CNC - Free Report) and The Joint Corp. (JYNT - Free Report) holding a Zacks Rank #2 (Buy).

Centene delivered a positive surprise in each of the last four quarters, with an average beat of 10.6%.

The Joint Corp. surpassed the Zacks Consensus Estimate in three of the four reported quarters, with an average positive surprise of 5.5%.

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