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What's in the Cards for UnitedHealth (UNH) Q4 Earnings?

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We expect consolidated revenues to grow at UnitedHealth Group Inc. (UNH - Free Report) , aiding its fourth-quarter 2018 earnings, slated for release on Jan 15, 2019, before the opening bell.

Revenue growth at both UnitedHealthcare and Optum segments along with membership strength is expected to boost the company’s fourth-quarter results.

Factors to Influence Q4 Results

For the company’s UnitedHealthcare segment, we expect revenue rise from an increasing number of people served, greater membership growth in higher acuity programs coupled with higher pricing to cover expected medical cost trends and resumption of the health insurance tax for 2018. The Zacks Consensus Estimate for the segmental revenues is pegged at $45.3 billion, translating into year-over-year growth of 8.9%.
 
We expect Optum, the company’s health service business, to be a significant catalyst for its earnings. Optum’s sub-segment Optum Health’s earnings are anticipated to be driven by growth in care delivery, and behavioral, digital consumer engagement and health financial services while its sub-segment OptumInsight’s revenues are expected to be bumped up by an expansion in payer technology and services plus care provider advisory services. The Zacks Consensus Estimate for this segment’s revenues stands at $26.5 billion, up 8.8% year over year.

The company’s solid membership can be attributed to rise in Medicaid and Medicare Advantage enrollments. Medicare Advantage should see more people being served through individual and employer-sponsored group Medicare Advantage plans. Medicaid growth should be bolstered by the combination of new state-based awards and improvement in established programs. Medicare Supplement membership should gain from sturdy customer retention and new sales.

This might be offset to some extent by a decline in fee-based membership in the commercial group market. Membership in the company’s international markets should grow from business expansion owing to acquisition of Empresas Banmédica, a leading health care provider and insurer serving Chile, Colombia and Peru, in the first quarter of 2018.

However, UnitedHealth is expected to incur additional investment and operating costs for accelerating existing initiatives along with artificial intelligence, data analytics, individual health record custodianship, digital health, better net promoter scores and health-related initiatives in local communities. These ramped-up investments will induce incremental operating expenses of $200-$300 million for 2018. Part of this spending was borne by the company during the fourth quarter, which might further escalate its operating expenses.

The company’s profitable results should lead to an enhanced return on equity.
The operating cost ratio might show an increase due to the health insurance tax.  

The company’s cash flow in the fourth quarter will be reduced by $2.6 billion on account of payment to the U.S. treasury on Oct 1, 2018 for the customers’ portion of the nation’s health insurance tax pertaining to 2018.
The bottom line is expected to be aided by shares repurchased in the fourth quarter.

Management’s Guidance

The company expects full-year adjusted earnings per share to be $12.80, implying about 27% growth.

Earnings Surprise History

The company boasts an attractive earnings surprise history, having surpassed estimates in the trailing four reported quarters, the average being 3.67%. This is depicted in the chart below:

UnitedHealth Group Incorporated Price and EPS Surprise

Here is what our quantitative model predicts:

Our proven model does not conclusively show that UnitedHealth is likely to beat on earnings this earnings season. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. But that is not the case here as you will see below.

Earnings ESP: UnitedHealth has an Earning ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: UnitedHealth carries a Zacks Rank #2 (Buy), which increases the predictive power of ESP. However, its 0.00% ESP makes surprise prediction difficult.

Stocks That Warrant a Look

Here are some companies worth considering in the healthcare sector as our model shows that these have the right combination of elements to beat estimates this to-be-reported quarter:

Humana Inc. (HUM - Free Report) has an Earnings ESP of +0.22% and a Zacks Rank of 2. The company is expected to report fourth-quarter 2018 and full-year financial results on Feb 6. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cigna Corp. (CI - Free Report) has an Earnings ESP of +0.48% and is a Zacks #2 Ranked stock. The company is expected to report fourth-quarter 2018 and full-year earnings numbers on Feb 1.

HCA Healthcare, Inc. (HCA - Free Report) has an Earnings ESP of +2.09% and is a #2 Ranked player. The company is expected to report fourth-quarter 2018 and full-year earnings figures on Jan 29.

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