Shares of UnitedHealth Group (UNH – Free UnitedHealth Stock Report), a diversified health and well-being company and the most recent addition to the Dow 30, were down in initial trading after the company announced its March-quarter showing. Earnings came in at $1.16 a share, a penny ahead of our call, but down from the $1.31 posted in the same period of last year. The decline in profits can be traced directly to the fact that the nation's largest health insurer paid out more for medical claims and booked a smaller gain due to leftover insurance claims. To be exact, the insurer booked a $280 million gain in the term because claims left over from previous quarters came in lower than scheduled, which allowed it to release money held in reserve. That figure compares to the $530 million gain registered in the first three months of 2012. Elsewhere, medical expenses, which are the company's largest cost by a wide margin, rose 13%, on a year-over-year basis. Meanwhile…
UnitedHealth is facing higher operating costs related to a rise in prices that doctors and other providers charge for the medical services they perform. The Affordable Care Act, which has been initiated slowly and will be in full swing next year requires UNH to provide additional benefits on many plans, has boosted taxes, and sets limits on the amount of profit that can be attained in certain areas. The remainder of 2013 will likely be an adjustment phase to these alterations. With that, management has historically issued bottom-line guidance with a conservative bent and then ratcheted that metric up as the year progresses. We do not see that scenario developing this year. Therefore, we reiterate our $5.50-a-share earnings target for this year, and expect that amount will be cemented over the next few quarters. This may be the reason behind the shares slightly unfavorable reaction to the most recent earnings release.
On the other side of the coin, revenues climbed 11%, to $30.34 billion in the March period. This figure was a tad shy of our $30.5 billion target, but was basically in line with consensus estimates. On a much more negative note, management brought down its full-year top-line guidance by $2 billion, to $122 billion. A very large client switched its insurance to a self-funded approach, where it pays the claims and the insurer simply administers the policy. This kind of setup brings in lower revenues for the insurance company. Using the $122 billion number, the top line will probably still advance north of 10% this year.
Elsewhere, the company and the rest of the medical services industry dodged a bullet when the Centers for Medicare and Medicaid Services (CMS) reversed course and decided to boost reimbursements on Medicare Advantage plans. This portion of the business is privately run versions of the government's Medicare program for the elderly and disabled people. The specter of rate cuts had UnitedHealth contemplating some drastic moves, such as exiting markets, but for now, at least, any moves like that have been avoided.
Enrollment appears to be rising nicely. The company added 1.1 million new members during the three-month period bringing its total up to 86 million members as of March 31st. Consumer-directed plans showed particular strength. Here, 5.6 million members are now on board, an 18% increase from this time last year. In those agreements consumers pay directly for a larger share of medical costs.
In all likelihood, the investment community is already looking ahead to 2014. Assurances that the sweeping reforms brought on by the Obama Administration are manageable will lead to rises in UNH's share price. The company has not provided much color on this front, but we are initially expecting earnings to come in at around the $6.00-a-share mark. Moreover, we think this company has an ace up its sleeve with its Optum unit. This arm is a consulting branch that focuses on information and technology-based health services. Reform will prompt many other companies to get in line with new government mandates as doing so in a timely manner will be rewarded. Due to that phenomenon, we look for business at Optum to pick up briskly in the near future.
From an investment perspective we are not currently high on UNH stock. Comparisons in the year ahead will be toned down due to the changing landscape in the medical services field. Too, a steady incline since being brought into the Dow 30 has diminished appreciation prospects three to five years hence. Lastly, its dividend payout is not up to snuff in comparison with the Value Line median. In sum, while we think UNH will lead its sector into the future and post admirable results, all these positives appear to be already baked into its current quotation, however.
About The Company:UnitedHealth Group is a diversified health and wellbeing company. It offers products and services to more than 70 million individuals through two business segments: UnitedHealthcare (network-based health care benefits) and Optum (information and technology-based health services).
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.