One axiom of stock investing is to find a well-run company that provides products and services everyone will need into the foreseeable future.
Few necessities are as vital as healthcare. Add an aging population and expanded government insurance to the equation and selective healthcare stocks make solid long-term bets.
A particularly appealing health sector play now is UnitedHealth Group Inc. (NYSE:UNH), a healthcare powerhouse that reported strong results for the fourth quarter and full year 2014 before markets opened today.
Currently the market leader in the United States, UnitedHealth Group offers health benefit plans for individuals and public and private employers of all sizes. Among the company’s diversified portfolio of health insurance and delivery products are pharmacy benefit management, benefit plan design and claims processing services.
UNH today reported reported fourth quarter earnings per share (EPS) of $1.55 on revenue of $33.4 billion, compared to EPS of $1.41 during the same period a year ago. Wall Street had expected EPS of $1.50 on revenue of $33.1 billion. The company’s premium revenue in the quarter jumped 6% year-over-year to $29.3 billion.
Significantly, UNH’s cost containment measures appear to be bearing fruit through an improving “medical care ratio,” the money it spends to process and pay medical claims compared to the insurance premiums it generates. The ratio in the fourth quarter dropped to 79.8%, compared to 81.2% in the same quarter a year ago.
For the full year, UnitedHealth Group reported EPS of $5.70 on revenue of $130.4 billion, compared with EPS of $5.50 and revenue of $122.5 billion in 2013. The analysts’ consensus had called for EPS of $5.64 and revenue of $130.1 billion. Cash flows from operations in 2014 reached $8 billion, a year-over-year increase of 15%.
For 2015, management provided guidance of between $140.5 billion and $141.5 billion in revenue and between $6 and $6.25 in EPS.
UNH’s year-over-year EPS increase of 3.6% in 2014 was mostly driven by gains in Medicare and Medicaid enrollment. Combined enrollment of all types of clients dipped from 45.4 million in 2013 to 44.9 million in 2014. However, Medicare and Medicaid enrollment rose from a combined total of 10.4 million in 2013 to 11.8 million in 2014, a strong year-over-year jump of 13%.
UNH Stock: Profits From the Poor
It’s in the field of Medicaid that UNH faces its greatest growth opportunities. One of the major changes under the Patient Protection and Affordable Care Act, or Obamacare, is that millions of lower-income Americans without health insurance will qualify for Medicaid, the federal-state partnership that pays healthcare bills for the nation’s neediest families.
According to figures this year from the non-partisan Congressional Budget Office, by 2016 an estimated 11 million to 16 million Americans will be newly insured through Medicaid, whose coverage will be fully paid by the federal government. States now pay about half; Obamacare offers financial assistance for states to expand coverage.
The latest tally shows that 27 states and the District of Columbia have expanded Medicaid coverage; 24 states with conservative governors have vehemently refused to expand Medicaid coverage for ideological reasons.
It’s unclear, though, how long voters will allow state lawmakers to leave federal money on the table, especially as the economy improves and consumers feel more confident.
Medicaid expansion officially started in January 2014, funneling millions of new customers into the open arms of Medicaid HMOs. UnitedHealth Group dominates the Medicaid HMO business and should see its coffers swell in 2015 not just from an influx of subsidized poor people but also middle income Americans choosing its individual plans through the various state run health insurance exchanges that were set up under Obamacare.
What’s more, Obamacare imposes stiff fines on individuals without health insurance, in an effort to increase the insurance risk pool.
The Bottom Line
The federal government is a multi-trillion-dollar juggernaut and when it starts to infuse an investment sector with money, the pie gets bigger for companies looking to profit. Few sectors are bigger and more pervasive these days than healthcare.
UnitedHealth Group is well-positioned to profit from the landscape as shaped by Obamacare, an aging population that will need more care, and the ranks of uninsured Americans who will now get coverage for the first time in their lives.
With a strong balance sheet, an entrenched presence in the Medicaid business and optimistic guidance for 2015, UNH should weather the market turmoil that’s likely to unfold this year, especially in the energy markets.
Meanwhile, Obamacare’s enrollment numbers are increasing and the GOP’s chances of repealing the sweeping law are increasingly remote. UNH stock is a blue chip bet on the growing imperative to stay in the pink.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
