UnitedHealth Earnings Preview: Open Enrollments, Optum In Focus

UnitedHealth (NYSE:UNH), the largest health insurance provider in the U.S., is scheduled to report its fourth quarter and full year 2014 earnings on Wednesday, January 21. ((Q4 2014 UnitedHealth Earnings Conference Call, Investor Relations)) For the final quarter of 2014, we expect an impact from UnitedHealth’s expanded presence on nearly two dozen health exchanges in the ongoing 2015 open enrollment period. We expect the company to keep up with the growth it has experienced during the year in the final quarter as well, in which Optum division played a crucial role. On the back of consistent strong performances in the past few quarters, the company revised its guidance for total revenues in 2014 to $130 billion. ^[1] The company seems to be on course to achieve that target. Improvement in operating margins, solid revenue growth across divisions, expansion of its customer base and a spike in EPS has helped boost the company’s stock. During 2014, the stock surged by over 35%, breaching the $100 mark.

The company beat market estimates in the third quarter and reported 7% year-over-year growth in revenues. Operating income increased 5% year-over-year, and its operating margins also improved from 6.1% in the third quarter of 2013 to 6.4% in the third quarter of 2014. ^[2] In particular, the Optum division continued to perform strongly, and contributed about 30% of the company’s total operating income during the quarter. ^[3]

We have a price estimate of $89 for UnitedHealth’s stock, which is at about a 15% discount to the current market price.

See Full Analysis For UnitedHealth Group Here

Expanded Presence On Health Exchanges In Focus

During the previous quarter, UnitedHealth expanded its Medicaid membership base by about 250,000, in line with the company’s plan to add around a million new customers for the full year 2014. In the third quarter, the company also successfully grew its customer base in the Medicare segment by nearly 80,000.

For the final quarter, we expect to see more growth in the customer base, particularly benefiting from a spurt in enrollments in the ongoing Open Enrollment period. An increased presence on health exchanges across the U.S. will also aid the company. Another positive sign is that early estimates point to over 6.6 million enrollments at the end of seventh week of enrollments on January 2, compared to about 8 million enrollments in the entire 2014 enrollment period. ^[4] The Open Enrollment period will continue until February 15. Despite an increased level of coverage as a result of the Affordable Care Act (ACA) , a large number of people in the U.S. remain uninsured. As per the latest National Health Interview Survey, during the first six months of 2014 approximately 12% of the U.S. population did not have health insurance coverage, although this was significantly down over the previous year. ^[5] This translates into about 38 million uninsured potential customers, providing a huge growth opportunity for health insurance companies. We expect the number of enrollments to register solid growth compared to 2014.

Since 2014 was the first full year since the implementation of the ACA, its net impact will be seen in full year earnings. We will be keeping a close watch on how UnitedHealth benefits from the growth in enrollments, as well as the impact on earnings from funding cuts and minimum medical ratio (medical costs divided by premiums) requirements.

Optum To Sustain Growth Momentum

Optum was UnitedHealth’s fastest growing business in 2014. Optum’s total revenues grew by 25% to over $35 billion during the first three quarters of 2014, compared to the same period in 2013. Its contribution to the company’s revenues spiked to nearly 30% in 2014, compared to 20% in the previous year.

Given the high growth achieved in the Optum division, the company entered into a slew of collaborations in research and innovation, and also made an acquisition to enhance and expand its services. ^[6] In addition we expect private health insurance and Medicare to aid in the division’s further growth, as it will have a larger potential customer base.

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1. CEO Discusses Q2, 2014 Results – Earnings Call Transcript, Seeking Alpha [↩]
2. SEC 8-K Filing [↩]
3. UnitedHealth Group Incorporated’s CEO Gail Boudreaux on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha [↩]
4. Open Enrollment Week 7: December 27, 2014 – January 2, 2015, U.S. Department of Health and Human Services [↩]
5. Health Insurance Coverage: Estimates From the National Health Interview Survey, January-June 2014, Center For Disease Control and Prevention [↩]
6. UnitedHealth’s MedSynergies Acquisition To Aid Optum’s Growth [↩]