UnitedHealth Group Inc. (UNH - Free Report) maintained its strong operating performance trend of the past many years in 2019 However, its shares failed to reflect the same.
In 2019, the stock has rallied 17.5%, underperforming the industry’s growth of 18.4%. Other companies in the same space include Humana Inc. (HUM - Free Report) , Anthem Inc. (ANTM - Free Report) and Molina Healthcare, Inc. (MOH - Free Report) , which have gained 28.4%, 16.3% and 16.9% in the past year, respectively.
The stock of UnitedHealth was exposed to volatility as investors shied away from its industry due to regulatory uncertainties emanating from various political proposals, the most prominent being ‘Medicare For All’ (proposed by Bernie Sanders) to reform the healthcare system.
The company’s fundamental strength is, nevertheless, reflected by its superior segmental performances and a solid balance sheet position. Its earnings consistently surpassed estimates in each of the past 24 quarters.
UnitedHealth maintains its leadership position in the health insurance industry by virtue of its two complementary business platforms, namely Optum for health services and UnitedHealth for health benefits.
In 2020, its segment, UnitedHealthcare is poised to grow on the back of its vast Medicare and expanding Medicaid business. Total enrollment is expected to reach 49.8-50.4 million in 2020, led by Medicare Advantage growth as management expects to further extend the company’s market share. In Medicare, margins will be somewhat under pressure year over year by the return of the Health Insurance Tax in 2020. The Medicaid business should gain from expansion of Medicaid in 15 states in 2020.
Its Optum segment provides a good revenue diversification. It transformed UnitedHealth from a health insurance company into a healthcare company by opening a number of allied businesses, such as data and analytics, care delivery, population health management and engagement, health financial services, health IT, benefit and care operations and pharmacy care services under its subsegments OptumHealth, OptumInsight and OptumRx.
The aforementioned segment has grown over the years on the back of a slew of mergers and acquisitions. Recently, its sub-segment Optum Rx announced that it will acquire Diplomat, a provider of specialty pharmacy and infusion services.
In 2020, Optum’s revenues will be primarily driven by a strong contribution from OptumHealth (up 27-30%) followed by OptumInsight (up 11-16%) and Optum RX (up 7-9%).
For next year, management expects revenues of $260-262 billion, representing a 7-8% upside from its upwardly revised 2019 guidance of $242 billion. UnitedHealth’s top line is expected between $208 billion and $210 billion while Optum’s revenues are estimated between $127 billion and $128 billion. Operating earnings are envisioned to in the range of $21.7-22.3 billion, implying a nearly 8.5% margin at the mid-point. Adjusted EPS of $16.25-16.55 indicates 9% growth from the updated 2019 outlook of nearly $15.00.
Though the company will continue to perform well in 2020, regulatory instability from various proposals to reform the healthcare will continue through the 2020 presidential elections. This is most likely to expose the stock to volatile swings.
UnitedHealth carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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