A Look At The Factors Driving Our $105 Price Estimate For UnitedHealth

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UnitedHealth Group

UnitedHealth Group (NYSE:UNH), the largest health insurer in the United States, posted solid growth figures in 2014, despite fears of an adverse impact from the implementation of the Affordable Care Act (ACA). The company’s operating income and revenues both recorded high single digit growth rates. [1] UnitedHealth’s stock rallied past $100, a lifetime high, rising by over 35% during 2014. Taking into account the strong growth momentum in the Medicaid and Optum divisions, as well as promising prospects in international markets, we have revised our price estimate for the company’s stock to $105. In this note, we discuss in detail the key factors driving our price estimate for UnitedHealth.

See Full Analysis For UnitedHealth Group Here

Medicaid Enrollments To Rise

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UnitedHealth holds about 11% of the Medicaid market in the U.S. UnitedHealth ended the year with the addition of over a million new customers, of which 135,000 came in the last quarter alone. This is nearly a 25% increase in new enrollments for 2014 compared to 2013. At the end of 2014, the total number of people served by the company’s Medicaid division stood at slightly over 5 million. [2]  In our revised model, we forecast the growing trend to continue with the company expected to add more than half a million new customers in 2015. The company will gain from growth in overall Medicaid Managed Care enrollments in the U.S. UnitedHealth will take advantage of its expansive network as well as competitive pricing to sustain the growth momentum in the division. On the other hand, the company will also face increased competition due to the health exchanges.

Optum On Strong Footing

Optum is divided into three primary segments: OptmRx, OptumInsight and OptumHealth. We expect the strong performance by Optum to continue in 2015 and beyond. The company of late has made a concerted effort to channel investments towards research and acquisitions that we believe will drive business growth in the coming years. Increasing business coming from a rising consumer base in the company’s other divisions will further fuel this growth.

OptumRx offers pharmacy benefits management (PBM) services to more than 30 million customers nationwide by processing about 570 million retail drug prescriptions annually, which is about a 13% share in the U.S. retail prescription market. Responsible for processing and paying prescription drug claims for its clients, OptumRx was the fastest growing business in the entire Optum division in 2014. OptumRx revenues have almost doubled since 2010, and there was improvement in the bottom line as well. This is exhibited by the fact that EBITDA margins improved from under 3% in 2011 to 4.4% in 2014. The company registered a 10% year-over-year (y-o-y) increase in retail prescriptions filled during 2014. After declines in revenue per prescription for two consecutive years (2012 and 2013), it jumped by about 22% in 2014 to $56. We forecast the number of scripts processed by the company to grow at nearly 10% y-o-y in 2015.

OptumHealth primarily provides health and wellness services to over 63 million individuals across the U.S. One of the fastest growing and promising businesses for UnitedHealth, it added more than $11 billion in revenues during 2014 which is more than double the revenues earned from the business in 2010. Going forward, we expect the company to sustain this strong growth for the next few years. This will again be driven by increasing business coming from customers in UnitedHealth’s other businesses.

OptumInsight provides software and information services as well as advisory and outsourcing services to clients such as hospitals and physicians. OptumInsight also caters to government bodies, as well as biotechnology, pharmaceutical and medical device companies. Growth in Optum360 revenue management and government exchange services boosted revenues from the segment in 2014. During the year, revenues grew 10% y-o-y and we expect slightly higher growth going forward, driven by an increase in the number of clients. Additionally, EBITDA margins from the business showed massive improvement from 15% in 2013 to over 22% in 2014. Going forward, we expect stability at the current levels. However, if these margins were to fall back to 2013 levels, there would be a 5% downside to our price estimate.

Can UnitedHealth Recover Lost Ground In Private Health Insurance?

The company lost close to 1.5 million customers across its risk-based and fee-based private health insurance portfolios as well as the TRICARE program in 2014. As a result of a more than 4% y-o-y decline in its customer base, the top line suffered. Revenues from the division declined by 4.7% y-o-y. The bottom line was also hit, as EBITDA margins continued the declining trend of 2013 to end below 7%. Going forward, we expect the downward trend in the number of policyholders to slow down before returning to positive growth in a couple of years. Our estimates are based on the reasoning that the company has now become a bigger participant at health exchanges . The company increased its presence to 23 health exchanges nationwide for the Open Enrollment Period 2015, including in Texas, Florida and Pennsylvania which are among the largest markets in the country. This has resulted in gains for the company, with about half a million enrollments in the 2015 enrollment season. [3] Overall 11.4 million consumers purchased or renewed health insurance coverage in the Open Enrollment Season 2015, up from about 8 million last year. Going forward, consumer participation at healthcare exchanges is likely to continue to rise. According to the Congressional Budget Office (CBO), enrollments on health insurance exchanges will touch 25 million in 2017. UnitedHealth, being the largest health insurer, should be able to capitalize on the growing business opportunity. However, the company will also face stiff competition on these exchanges as consumers now have more options.

International Prospects Look Promising

In 2014, the company’s international customer base declined due to increased pricing. Enrollments declined by about 8% y-o-y, but the revenues were still over 8% higher than in 2013 on the back of increased revenue yields and hospital services revenue growth. UnitedHealth acquired Amil Participações SA to tap into the flourishing middle class in Brazil as well as Amil’s established healthcare network in the country. With the falling unemployment rate, we expect the employer-offered health insurance market opportunity to expand. [4] Additionally, factors such as rising income levels, higher education levels and an aging population should drive demand for quality healthcare services, in turn providing a strong base for growth in the health insurance industry. [5] Considering all these factors, we expect growth in enrollments to return at a modest pace for UnitedHealth in the country.

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Notes:
  1. Growth In Optum, Medicaid Drives UnitedHealth To A New High; Trefis []
  2. SEC 10-K Filing []
  3. Fourth Quarter and Full Year 2014 Earnings Release, Investor Relations []
  4. Brazil’s Unemployment Rate Declines in December, The Wall Street Journal []
  5. DIVIDING THE PIE IN BRAZIL: INCOME DISTRIBUTION, SOCIAL POLICIES AND THE NEW MIDDLE CLASS, OECD []