We expect health insurer major UnitedHealth Group Inc. (UNH) to beat expectations when it reports fourth-quarter and full-year 2014 results before the opening bell on Jan 21. The company kicks off the managed care sector earnings season since it is the first to report earnings every quarter.
Why a Likely Positive Surprise?
Our proven model shows that UnitedHealth is likely to beat earnings because it has the right combination of key factors.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +0.67%. This is a meaningful and leading indicator of a likely positive earnings surprise for this company.
Zacks Rank: UnitedHealth carries a Zacks Rank #2 (Buy). The stocks with Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of UnitedHealth’s Zacks Rank #2 and +0.67% ESP make us confident of an earnings beat in the upcoming release.
What is Driving Better-than-Expected Earnings?
We expect UnitedHealth’s fourth-quarter earnings and revenues to see a strong build up from its health service segment named Optum, as its investment spending declines and its prior investment spending begins to bear fruit.
The company’s health benefit segment UnitedHealth Care will also contribute to top-line growth but at a lesser degree than Optum.
We also expect margins to benefit from medical utilization that was likely restrained by continued medical management and consumer/physician engagement efforts.
Additionally, UnitedHealth’s use of capital for share buyback will provide an extra cover to earnings.
For 2014, the insurer expects revenues of $130.0 billion which is 6.1% higher than the actual revenue of $122.5 billion reported in 2013. Bottom line for the UnitedHealth Care segment is expected to decline by 14% compared to an increase of 30% at Optum, leading to overall earnings of $5.60–$5.65 per share versus reported earnings of $5.50 per share in 2013, indicating an increase of 2–3% year over year. The Zacks Consensus Estimate for 2014 earnings is $5.65 per share.
In the last quarter, this health insurer delivered a 6.5% positive earnings surprise. The average beat for the trailing four quarters is 5.4%.
Other Stocks to Consider
Here are some other companies in the health care space with the right combination of elements to post an earnings beat this quarter:
Centene Corp. (CNC) has an Earnings ESP of +0.59% and carries a Zacks Rank #1 (Strong Buy).
Anthem Inc. (ANTM) has an Earnings ESP of +1.16% and carries a Zacks Rank #2.
Humana Inc. (HUM) has an Earnings ESP of +0.86% and carries a Zacks Rank #2.
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