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Dow-30 Earnings: UnitedHealth Group - Fourth Quarter 2013
UnitedHealth Group (UNH – Free UnitedHealth Group Stock Report), the largest health insurance company in the United States and a growing player in the pharmacy benefits realm, has announced results for the fourth quarter and full-year 2013. Both revenues and earnings were on point with what we were expecting, and management reiterated guidance that it had put out at its annual investor meeting last month. Still, Wall Street seems nervous that UNH, which is known for setting the bar low and hurdling it, only met expectations. This could be some indication that the onset of the Affordable Care Act and subsequent budget cuts may well pinch results starting in 2014. For that reason, we think, UNH shares were down more than 2% in mid-morning trading following the release.
The top line for the December interim came in at $31.12 billion, just ahead of our $30.9 billion call. This figure compares handsomely with the $28.8 billion in revenues posted in the fourth quarter of 2012. The term marked the beginning of sales of new individual plans created under national healthcare reform by the Obama Administration. UNH has chosen to limit its participation in this plan to just three states. Regardless, management pointed out that sales to individuals and small employer groups helped add a number of new customers in the quarter. Whether that will lead to an increased number of states being brought into the fold is yet to be determined. For the full year, revenues came in at $122.5 billion, a shade ahead of our $122.3 billion estimate.
From a bottom-line perspective, UnitedHealth posted share net of $1.41, a 15% annual increase, and exactly in line with our target. A sizable gain from the company's Optum division (more below) played a key role in this growth and it does not even sell insurance. For 2013 as a whole, UNH booked earnings of $5.50 a share, also in line with consensus expectations. UnitedHealth is the first of the major medical insurers to report fourth-quarter financials and is thus viewed as a bellwether for things to come in the industry this earnings season. This report puts the Medical Services Industry on a good footing heading into 2014.
Total enrollment grew to 45.4 million, from 40.9 million at the end of 2012. This figure takes into consideration the acquisitions that UNH has made, including a sizable one in the Brazilian market that we think will be a home run over time. Perhaps more important, 17% of this increase is from Medicare Advantage accounts. These plans are privately run versions of the government's Medicare program that covers the healthcare of the elderly and disabled. UNH is now the nation's largest provider of these services with three million lives in tow. The government pays insurers involved in these plans a premium so that they will provide extras like dental and vision coverage. But, funding on this front is being scaled back this year due to the massive healthcare overhaul. Picking up more of this business has the potential to put a strain on UNH's performance, which we believe may be the cause for the initial investor trepidation following today's announcement. But, the company's revenue streams are plentiful; commercial lines, Medicaid business, and the fast-growing Optum division back up this fact.
Optum led the way as far as United's health technology platform is concerned. This branch does consulting and other advisory services, such as IT and pharmacy benefits. Operating earnings from Optum skyrocketed 43%, to $655 million in the quarter. Also, the QSSI unit got some favorable press due to its dealings with the federal Web site for the new health insurance reform, Healthcare.gov. QSSI helped fix some of the early bugs that rendered the initial rollout of this Web site problematic. We believe this Optum portion of the portfolio still has its best days ahead of it and that UNH shares deserve a premium versus their peers due to the potential of this entity.
As far as 2014 goes, management has set the earnings range between $5.40 and $5.60. We are picking up the $5.60 figure and can see roughly a dime of upside to that call if reform goes smoothly on all fronts. Clearly, the extent of the budget cuts will go a long way in deciding the final figure. Subscribers will note the $5.70-a-share estimate on our last full-page report, but as previously stated, that number was trimmed at the time of the aforementioned investor day. With that, our $5.60 earnings target is actually static. The same can be said for revenues. We are presently looking for full-year 2014 revenues to come in at about $129 billion, down from the $132.3 billion estimated back in December. That metric is also at the apex of provided guidance ($128 billion to $129 billion).
The investment merits of this equity are hard to overlook. We like the recent use of the company's growing cash coffers. Nearly $3.2 billion was spent on share repurchases in 2013 and $1.1 billion was paid out in dividends, a year-over-year spike in that payout of 29%. Finances are solid, and the stock's addition to the Dow 30 has upped its profile in the medical services field and on Wall Street. Yes, the next year-plus may be a tumultuous one, but UNH has the leadership in place to weather the storm, in our view. With that, we think this selection is a strong play for long-term total return and think subscribers would be wise to take advantage of any dips in the stock price like the one currently being presented.
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.