UnitedHealth Beats on Q3 Earnings & Revenues, Guides Up

Health insurer UnitedHealth Group Inc. (UNH) reported third-quarter 2014 earnings of $1.63 per share, beating the Zacks Consensus Estimate by 10 cents. Earnings grew 6.5% year over year.

The improvement came on the back of higher revenues. Strong results from UnitedHealth reflect a solid performance from its health benefits business along with strong growth from the Optum segment.

UnitedHealth posted revenues of $32.8 billion, up 7.2% year over year and marginally ahead of the Zacks Consensus Estimate of $32.7 billion. The year-over-year increase was an outcome of broad-based organic growth and business expansion in both health care benefits and health care services.

The quarter saw a year-over-year decline of 90 basis points (bps) in medical care ratio to 79.7%.

Total operating cost came in at $29.9 billion, up 6.7% year over year. The increase stemmed primarily from higher, medical and operating costs.

Operating margin of 8.9% increased 30 bps year over year.

Segment Performance

During the reported quarter, UnitedHealth’s health benefits segment – UnitedHealthcare – witnessed revenue growth of 5.6% year over year to $30.0 billion. The increase came on the back of strong growth in membership in the public and senior sectors and commercial price increases, partially offset by a decline in membership in commercial benefits. Earnings from operations of $2.0 billion grew 5% year over year.

Revenues from the company’s other segment – the health services segment branded Optum – improved 21% to $12 billion on a year-over-year basis. Earnings from operations surged 27% year over year to $865 million. Continued progress on Optum’s plan to accelerate growth and improve margins and productivity by strengthening integration and business alignment drove the improvement.

Membership Enrollment

UnitedHealth ended the quarter with 44.935 million members, down 340,000 year over year.

Capital Position

The company generated cash flows from operations of $3.2 billion, down from $196 million in the prior-year quarter.

The company ended the quarter with debt-to-equity ratio of 35.0%.

Shareholders’ equity was $32.6 billion, up from $32.2 billion as of Dec 31, 2013.

Share Repurchases Update

UnitedHealth Group spent $3.0 billion to buy back 38 million shares year to date.

2014 Guidance Update

UnitedHealth pulled up its previous 2014 earnings forecast. It now expects earnings per share in the range of $5.60 to $5.65 per share, up from the previous estimate of $5.50 to $5.60. The revenue projection of $130 million also reflects a rise from the earlier estimate of $122 billion. The company projects full-year cash flows from operations of $8.0 billion.

Our Take

The company’s results for the first nine months of 2014 reflect consistent gain from strong growth in Medicaid and Medicare businesses, and superior performance by its international operations. The company’s expanding business on public exchange markets and continued strong growth at Optum are the other factors driving growth.

We also favorably view UnitedHealth’s increased participation in the health insurance exchange, which will increase its membership. However, Medicare reimbursement cuts, industry fees and taxes, and higher operating costs are some of the headwinds facing the company. Nevertheless, capital strength and a niche market position are some of the positives that UnitedHealth should benefit from going forward.

UnitedHealth carries a Zacks Rank# 3 (Hold). Better-ranked players include HCA Holdings Inc. (HCA), Health Net, Inc. (HNT) and Triple-S Management Corporation (GTS). While HCA Holdings sports a Zacks Rank #1 (Strong Buy), Health Net and Triple-S Management carry a Zacks Rank # 2 (Buy).