UnitedHealth Beats Market Estimates, Revises Outlook For 2015

UnitedHealth Group (NYSE:UNH) announced strong growth figures for the first quarter on Thursday. The company reported 13% year-over-year (y-o-y) growth in revenues of $35.8 billion for the three month period as it experienced double-digit growth across businesses. ^[1] Operating earnings for the quarter grew by over 23% y-o-y as net margins also improved to 4%, up from 3.5% a year ago. The medical care ratio declined by 140 basis points to 81.4% during the March quarter. However, higher ACA (Affordable Care Act) fees caused its tax rate to rise to 43.3% from 42% a year ago.

After an outstanding first quarter, UnitedHealth has revised its outlook for 2015. On the back of strong business growth, the company now expects to earn $143 billion in annual revenues. Earnings per share guidance has also been revised upwards in the range of $6.15-6.30 compared to an earlier estimate of $6.00-6.25. ^[2] This increase accounts for the company’s share repurchase program as well as the acquisition costs relating to the Optum-Catamaran deal.

We have a price estimate of $114 for UnitedHealth’s stock, which is about 5% lower than the current market price. We have updated our model to reflect the recent earnings results and increased our price estimate by about 10%. This increase incorporates better than anticipated growth and the company’s revised revenue guidance for 2015. We have also reversed our previously estimated decline in UnitedHealth’s market share in Private Health Insurance space. To better understand these changes that drive UnitedHealth’s stock price we explain the company’s performance during the quarter in detail below.

See Full Analysis For UnitedHealth Group Here

Gains In Private Health Insurance, Finally

After a mixed private insurance performance in 2014, when enrollments fell by close to 5% y-o-y, recent figures show a rebound. UnitedHealth Care’s Individual and Employment division, which includes commercial risk and fees based insurance and TRICARE, saw enrollments increase by 680,000 compared to the fourth quarter of 2014. This growth came on the back of UnitedHealth’s expanded presence on 23 health insurance exchanges during the second enrollment period (which lasted from November 2014 until February 15, 2015). The company’s efforts at product enhancements accompanied by better policy renewal rates and the acquisition of new businesses fueled better than expected growth. Accounting for the positive response to UnitedHealth’s participation on health insurance exchanges and improved product mix, we have revised our forecast and now estimate an increase of over 2% in enrollments in 2015.

Revenues from the division grew 4% y-o-y to $11.4 billion on the back of growth in enrollments, increased pricing corresponding to rising medical costs, and greater demand for lower priced products on public exchanges. We currently estimate about a 7% y-o-y jump in revenues for the division in 2015.

Medicaid and Medicare Divisions Also Grew

The Medicare and Retirement division’s revenues increased by 11% y-o-y to $12.8 billion during the first quarter. Growth was fueled by an increase in the number of customers enrolled. Medicare, which serves people aged 65 and above, enrollments rose by 420,000 during the first quarter compared to a year ago.

Revenues from the Medicaid division increased 33% y-o-y to $6.9 billion during the first quarter. This came on the back of growth in enrollments by 750,000 since March 2014. However this was partially offset by the previously scheduled off-loading of about 175,000 members. In 2014 the company registered 23% y-o-y growth in enrollments in the Medicaid division on the back of an increase in demand. Going forward, we expect total Medicaid enrollments with UnitedHealth to increase by about 12% resulting in revenues of over $27 billion from the division in 2015.

Optum Division Continues To Impress

Optum division continued its successful run during the first quarter, reporting 15% y-o-y growth in revenues of $12.8 billion. All three business segments in the Optum division – OptumHealth, OptumInsight and OptumRx – recorded double-digit growth during the period. Operating earnings of $742 million at a margin of 5.8% were $92 million higher than in the first quarter of 2014. ^[3] Owing to the company’s recent acquisition of Catamaran Corporation – discussed in detail in our article UnitedHealth Expands PBM Footprint With Catamaran Acquisition – operating margins remained unchanged.

Growth in third-party business as well as an increase in the number of patients served by OptumHealth in health care delivery businesses led to 27% y-o-y growth in revenues from the segment. On the other hand, OptumInsight benefited from expansion of revenue management services leading to 11% y-o-y growth in revenues at $1.4 billion for the first quarter. We expect both segments to end 2015 with double-digit growth in revenues and maintain a healthy growth rate in the coming years as the healthcare services market catered to by these division expands.

The volume of retail prescription filled increased by 5% to about 150 million adjusted scripts during the first quarter. This led to 11% y-o-y growth in revenues from the OptumRx division. The company expects acquisition of Catamaran Corporation to substantially enhance its services in the segment from 2016 onwards. This will also result in a market share of close to 20% for the combined entity in the pharmacy benefits management industry in the U.S. We have accounted for the expected spike in market share in our revised model.

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1. UnitedHealth Group’s (UNH) CEO Stephen Hemsley on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha [↩]
2. SEC 8-K Filing, April 16 2015 [↩]
3. UnitedHealth Group Reports First Quarter Results, UnitedHealth Group Press Release [↩]