Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.
Reason for Report: 1Q18 Earnings Update
Previous Edition: News Update, Apr 18, 2018
Brokers’ Recommendations: Positive: 100% (17 firms), Negative: 0% (0); Neutral: 0.0% (0) Prev. Ed.: 16; 0; 0
Brokers’ Target Price: $274.47 (↑$6.59 from the last edition; 15 firms) Brokers’ Avg. Expected Return: 14%
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in theValuation table and PMES section. The extra figures in the Valuation table and PMES section come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
UnitedHealth Group, headquartered in Minnetonka, MN, is the largest and most diversified health insurer in the United States. Founded in 1977, the company through its subsidiaries offers health care coverage and related services including medical information management, health benefit administration, risk assessment and pricing, health benefit design as well as contracting and risk sharing.
Of the firms in the Digest group covering UnitedHealth, all 100% had a bullish stance and none had a neutral or a negative stance. 15 out of 17 firms covering the stock provided target prices ranging from $250.00 (6.4% upside from current price) to $310.00 (32% up from the current price).
Positive or equivalent outlook – 17/17 firms or 100% – These firms positively view the strong growth at Optum Care & Optum Insight and Optum Rx which is aiding Optum margins. Within UnitedHeathcare, Medicare remains the strongest growth segment though Commercial growth is expected to pick up in the second half of 2018. The company is focused on leveraging the strong rate increase in MA (reimbursement rates for MA were nearly up 3% year over year). The company stated that it is encouraged by the MA reimbursement rates for 2019, which had been underfunded for the past nine years. Management expects long-term industry growth of 8% in the business driven by an increase in penetration rate to over 50% (from approximately 35% currently) over the next 5-10 years.
Per these firms, synergies between Optum and UnitedHealthcare offer a uniquely differentiated competitive advantage. UnitedHealthcare benefits Optum by growing its customer base and by defining and scaling its innovation. On the other hand, UnitedHealthcare gets benefited by Optum’s industry-leading services in data analytics, pharmacy care services, population health management, health care delivery and health care operations.
One of these firms is encouraged by early results from the company’s PreCheck MyScript and Rally platforms. PreCheck MyScript has helped over 500,000 patients since inception last year with more than 20% of those patients switching to a more cost-effective alternative, which this firm views as evidence of the cost savings potential of the platform. This firm sees a huge growth opportunity in Rally, which doubled its membership base in 2017 to over 15 million with nearly 2.5 million people using Rally care per week. The firm believes this is just the early innings in what could be a significant medical cost bender for UnitedHealth. The company will be introducing Rally to MA members during 2019.
One of these firms believes that UnitedHealth is years ahead of its peers and can tackle any potential disruptors in terms of providing user friendly and healthcare cost saving platforms with Rally, PreCheck MyScript, and eSync to name a few. The company’s scale and data capabilities position it well to handle any potential disruptor (i.e., Amazon/JP Morgan/ Berkshire).
The company disclosed that it has strong interest in building its service business. To this end the company has already been making significant investments in care delivery.
According to these firms, the company’s valuation should firm up on recent news that Amazon is not entering the Hospital drug supply chain on entrenched competition and logistical challenges.
Per these firms, the Banmedica deal brought in additional members to the company’s international business.
The company is joining forces with Humana, Multiplan and Quest to launch a blockchain pilot addressing the $2 billion of unnecessary healthcare expenditure on reconciling errors in data between providers. This will help standardize consumer facing provider data such as practice address, specialties, in-network plans, and accepting new patients.
This firm sees opportunity for UnitedHealth to gain share overtime, with near-term growth opportunities in North Carolina and Ohio. UnitedHealth’s best-in-class technological capabilities and medical cost management should be drivers of a contract win in North Carolina , which the firm estimate can add $2.0 billion in revenues and 2-4 cents of EPS. For Ohio, the firm estimate this contract could generate between $1.25-2.33 billion in revenues and 2-4 cents of EPS. According to the firm, the company is well positioned given its strong report card ratings and market share positioning in ABD and Duals.
Per this firm, 20-30% of Medicaid market share is held by small, inefficient plans which will likely struggle to compete with companies like UnitedHealth which have far superior technological capabilities. This should lead to market share gains for the company over time. The company has the resources to invest in the technology needed to effectively manage medical cost trends.
The company’s capital deployment plans include share buyback and to pursue deals in expanding OptumCare business. The company targets to build-out the OptumCare business in 75 targeted markets.
For 2019, the company remains strongly focused on growing its revenues while at the same time maintaining and expanding margins.
Negative/Neutral or equivalent outlook – 0/17 firms or 0%
Apr 25, 2018
Overview
UnitedHealth Group Inc. provides a diverse and comprehensive array of health and well-being services to people through all stages of life. It is ranked second nationally in terms of medical membership. UnitedHealth is widely regarded as the industry leader with particular strength in product innovation, operating efficiency and consolidation. It offers health care benefits coverage and specialty services to employer groups and individuals.
UnitedHealth derives its revenues primarily from two operating divisions — UnitedHealthcare and Optum — respectively. Further information on the company is available on its website: www.unitedhealthgroup.com.
The firms identified the following factors for evaluating the investment merits of UnitedHealth:
Key Positive Arguments / Key Negative Arguments· UnitedHealth is well diversified across a number of segments with no one business segment contributing more than a third to the company’s revenues.
· Optum businesses provide solid growth opportunity; earnings from this business are expected to account for 30% of total operating earnings
· New growth strategies from operating the health insurance business in a highly regulated industry. In order to offset slower growth, the company is investing in other markets including international and Optum, which will drive long-term growth.
· UnitedHealth’s balance sheet flexibility is robust, which allows the company to undertake inorganic growth measures. / · As a result of the company’s participation in various government health care programs both as a payer and a service provider to payers, it is exposed to additional risks associated with program funding, enrollments, payment adjustments, audits and government investigations that could materially damage its business, operational results, financial position and cash flows.
Note: The company’s fiscal year coincides with the calendar year.
Apr 25, 2018
Long-Term Growth
Management envisions the U.S. healthcare market at $5.5 trillion and $11 trillion globally, by 2025. Given UnitedHealth’s expansion of businesses and capabilities, the company estimates that 13-16% EPS growth is achievable through the next eight-year period.
One of the firms believe that UnitedHealth’s medium-term growth is most solid and predictable, with Health Benefits businesses delivering solid low-double-digit growth in addition to the turbo-charged growth in all Optum segments across inorganic and organic drivers.
Per firms the company should derive long term growth from:
A well-diversified business profile: The firms believe that UnitedHealth Group is one of the most diversified of the listed managed care companies, with no one business segment contributing more than a third to the company’s revenues. With a broad range of product and service offering, the company targets the full spectrum of the population. As a result, earnings are buffered to a certain degree against any single change in market dynamics at the divisional level. This is testified by growth in the company’s revenues over the past five years. Though market conditions remains challenging, the firms expect the company to see revenue growth.
Strong Government Business: The firms believe that the acquisitions made by UnitedHealth in the Medicare Advantage (MA) space have made it a big player in the market. UnitedHealth enjoys high exposure in the Medicare market, which is expected to see a boom in the coming years as millions of Americans enter retirement age. Medicaid is also turning out to be a big growth driver for the company with Medicaid membership. Dual enrollment contracts already won by the company in Washington, Texas, Ohio and Michigan are also expected to boost enrollment along with significantly boosting top-line growth.
According to these firms the recent tax bill will re-accelerate privatization of Medicare to Medicare Advantage and further fuel growth in Managed Medicaid. This will be most beneficial for UnitedHealth which is a leader in the Medicare and Medicaid businesses.
Optum to drive long-term growth: Management expects the unit to produce double digit growth rate. The firms believe that UnitedHealth’s long-term core growth rate is expected to be heavily driven by Optum, which is on the path to grow revenues at a CAGR of approximately 22% from 2012-2018. Firms call Optum as a turbocharged engine with top-line growth and margin expansion across all segments, through organic build-out, and mergers and acquisitions. Firms note that management would reinvest nearly $200-$300 million of tax upside into growth accelerators, primarily in Optum, in areas such as artificial intelligence, health records, digital health, etc.
A number of acquisitions made from 2010 led to fast paced growth at this segment. They believe that OptumRx will see strong growth in revenues to driven by the acquisition of Catamaran and organic growth. The firms expect Optum to continue evolving within the consolidated company and help to offset headwinds from health reform. Management thinks that the company is under-penetrated in the health service area and investments in this field will reap benefits over the long term.
International Business: The firms also believe that UnitedHealth’s fast-growing international business will be a major contributor to its long-term growth. The company’s acquisition of Banmédica SA, combined with Amil in Brazil, should provide a foundation for growth in South America. Management seems positive on the longer-term outlook in South America and feels that the healthcare market in the region should replicate the U.S. healthcare market, with increasing role of managed care in managing healthcare.
Strong Balance Sheet: Firms believe that the company’s ability to generate solid ad increasing cash flow will be utilized for inorganic and organic growth measures, share buyback and dividend payments which will further drive its growth. Per the company these will contribute as much as 5% to its earnings per share growth rate.
Apr 25, 2018
Target Price/Valuation
Rating DistributionPositive / 100.0%
Neutral / 0.0%
Negative / 0.0%
Maximum Target Price / $310.00↑
Minimum Target Price / $250.00↑
Average Target Price / $274.47 ↑
Number of Analysts with Target Price/Total / 15/17
Risks to target price include Medical cost trends coming in higher than anticipated from a potential double-dip recession with provider re-upping intensity of service delivery; COBRA accelerated uptake; members utilizing more care in advance of lay-offs and pandemics; employers exiting very rapidly from the sponsorship of health benefits to combat medical cost inflation catalyzed by a double-dip recession; risks from a further decline in investment yields and investment impairments.
Recent Events
On Apr 17, 2018, UnitedHealth Group Incorporated reported first-quarter 2018 earnings of $3.04 per share, beating the Zacks Consensus Estimate of $2.92. The bottom line also rose 28.3% year over year.
Higher revenues, strength in both segments — UnitedHealthcare and Optum — plus membership growth led to this outperformance.
Capital Position Improves
Cash and short-term investments at quarter-end were $22 billion, up 42.3% from the 2017-end level.
Debt-to-total capital ratio was 41.6% on Mar 31, 2018, having contracted 190 basis points year over year.
Return on equity increased 210 basis points year over year to 23.8%.
Adjusted cash flows from operations of $3.2 billion rose 5% year over year.
UnitedHealth Group spent $2.65 billion to buy back 11.6 million shares and paid $722 million in dividends, which increased 21% year over year.
Guidance Update
UnitedHealth revised its 2018 financial outlook on the back of solid first-quarter results. It now expects current-year net earnings of $11.70-$11.95 from $11.65-$11.95 per share, estimated earlier. Adjusted net earnings have been raised to $12.40-$12.65 from the previously projected $12.30-$12.60 band.
Revenues
UnitedHealth recorded revenues of $55.2 billion, which outpaced the Zacks Consensus Estimate of $54.9 billion. Moreover, the top line compared favorably with the year-ago figure of $48.7 billion.
Segment Update
UnitedHealth derives its revenues primarily from two operating divisions — UnitedHealthcare and Optum — respectively.
In the reported quarter, the company’s health benefits segment, UnitedHealthcare, logged revenues of $45.5 billion, up 13.3% year over year.
Revenues from Optum improved 11.1% year over year to $23.6 billion, reflecting strong contributions from subsegments, namely OptumHealth and OptumInsight as well as OptumRx.
Membership Enrollment Increases
The company’s medical enrollment ascended 4.7% year over year to 48.9 million, led by growth in members served in the Public and Senior segment, partially offset by a lower Commercial and International membership.