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The largest health insurer in the United States, UnitedHealth Group (UNHFree UnitedHealth Group Stock Report) kicked off earnings season in the medical services field on a somber note when its revenues came in below expectations for the first quarter. As expected earnings fell from 2013's level, but that number was still on par with the reduced outlook provided by management some time ago. The investment community did not like the top-line shortfall, or the elevated expenses brought on by The Affordable Care Act, and bid these shares down by as much as 4% following the release.

Total revenues rose 5% year over year, to $31.7 billion, below our call of $32.5 billion. The market consensus trended more towards the $32 billion baseline, which was not met either. The uptick can be attributed to an increase in people being served in both the public and senior markets. Also, the company's Optum branch saw a significant climb in its sales (more color below). Still, the general assumption is that the rollout of reform did not go as smoothly as was anticipated and the delay in registration and so forth probably led to lesser revenues.

On the bottom line, share net came in at $1.10, exactly where we and the Street were anticipating. Yes, that figure is less than 2013's amount of $1.16, but the game has changed considerably in the health insurance field and a dip was expected by all parties. Costs to fund efforts to get ready for the onset of The Affordable Care Act certainly ate into this figure, and Medicare sequestration did not help either. Additionally, a decline in the overall level of reserve development led to the year-over-year decrease.

Without a doubt the beginnings of the new health care law hit UNH hard. In a statement, management asserted that the overhaul and subsequent budget cuts added about $0.35 per share in costs during the March interim. The federal law should be a long-term plus for United, as new business should be plentiful, as people gain coverage through state-based insurance exchanges that began in the fall. Still, the Act trims funding for Medicare Advantage, and alters how insurance companies can write their coverage plans. Further, there is now an industrywide tax that is nondeductible. Back in December, top management stated the law would pare after-tax operating earnings by $1.1 billion in 2014. No change to that amount was provided and/or mentioned with the first-quarter release.

Optum, the company's advisory and information technology arm, was split into three parts in anticipation of heightened demand once the reform kicked in. This move has proven most clairvoyant; revenues at Optum rose nearly 30% in the first quarter versus the same period in 2013. Earnings from operations were up 20%, to $650 million, in the same timeframe. We have already stated that we are enamored with this unit and we look for similar growth figures to be posted in each of the next several periods.

With three quarters of results still remaining in 2014 we think UNH's management has the capability to come out just fine when all is said and done. We are trimming our full-year top-line figure to get it more in line with the lesser amount of people enrolling. We feel the need to mention this is mainly due to issues on the government's side of the coin and no reflection of a failure to launch by United. That number is now set at $129 billion, down from $130.9 billion initially. Conversely, we are maintaining our $5.60-a-share earnings call. That number is at the top of the provided guidance range.

We think the negative backlash today is overdone. The investment community has been warned about everything that was laid out in the earnings release today, yet it acts as if any aspect of the news was shocking? That is just a knee jerk reaction in our book. The drop in the quotation should make this equity that much more appealing as a long-term holding for capital appreciation. Also, the stock's dividend is below the Value Line median at this juncture, but still adds a handsome amount of income for those with a total-return bent. We expect that stipend will climb considerably out to late decade as cash flow and profits rise in tandem.

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.