UnitedHealth Group Inc (NYSE:UNH) will report its fourth-quarter earnings on Jan. 17. UnitedHealth has beaten analyst estimates on earnings for nine consecutive quarters now. It beat earnings from the third quarter of 2014 through the third quarter of 2015, in the fourth quarter of 2015, and in the first, second and third quarters of 2016.
UnitedHealth stock has done well since March 2010, when the Patient Protection and Affordable Care Act (Obamacare) was signed. UNH stock’s 393% return beats that of competitors including Humana Inc (NYSE:HUM), Cigna Corporation (NYSE:CI), Aetna Inc (NYSE:AET) and Anthem Inc (NYSE:ANTM).
UNH rose 38% in 2016, in a year when healthcare stocks suffered amidst political concerns. Healthcare companies, such as insurers and pharmaceuticals, serve as convenient political scapegoats during election season. Politicians love to blame them for expensive prescription drugs and the high cost of care, to the chagrin of shareholders.
UNH stock is up 12% since Donald Trump won, climbing to $162 a share. Can UnitedHealth earnings keep the momentum going?
UnitedHealth Group’s Businesses
UnitedHealth derives 78% of its revenue and 60% of its earnings from health insurance, its core business. With 48 million customers, UNH is America’s largest health insurer. Amidst losses, UNH exited the Obamacare market last year in 31 out of 34 states.
UnitedHealth’s competitors are currently completing a wave of mergers announced in 2015. UNH has shied away from this, although it tried to buy Aetna for $40 billion in June 2015. In doing so, it has avoided painful legal battles. Last year, the Justice Department sued to block Anthem’s takeover of Cigna and Aetna’s purchase of Humana.
However, UnitedHealth recently agreed to buy Surgical Care Affiliates Inc (NASDAQ:SCAI), a provider of outpatient services, for $3.2 billion. Outpatient services, in contrast to inpatient services, do not require the patient to stay overnight.
UnitedHealth receives the remaining 40% of its earnings from its Optum division. OptumInsight provides software and consulting services for the healthcare industry, and OptumHealth sells health management solutions. OptumRx is a pharmacy benefits manager, a middleman between health insurers, pharmacies and drug manufacturers.
Risks to UnitedHealth
The U.S. healthcare system is underperforming, with the U.S. spending 1.8 times the OECD average as a percent of GDP on health without much to show for it in the way of health outcomes. This puts the industry at risk of disruptive innovation and political change.
The healthcare sector is heavily regulated and subject to political risk. Healthcare costs continue to rise, making pharmaceutical companies and health insurers easy targets for populist politicians. Trump grumbled over high drug prices last Wednesday, wiping $24.6 billion off the market capitalization of the nine biggest Big Pharma stocks in just 20 minutes.
Pharmacy benefit managers are not immune; their role is falling under greater public scrutiny as well. CVS Health Corp (NYSE:CVS), a major pharmacy benefit manager, recently announced it would sell a cheaper, generic version of EpiPen which could reduce its attractiveness as a target for politicians.
Trump’s push to lower drug prices could impact the margins of pharmacy benefit managers, such as UNH’s OptumRx.
Disruptive innovation remains another risk. New business models could cut out the middleman and disrupt the health insurance industry, much like Airbnb disrupted hospitality and Uber disrupted transportation. Others draw comparisons to cable TV and newspapers. Technology will allow price-sensitive customers, especially Millennials, to better inform themselves and shop around, putting pressure on margins.
UnitedHealth’s Strengths
As one of the nation’s largest health insurers, UNH stock benefits not only from economies of scale but also increased negotiating power. Aside from health insurance, 40% of UnitedHealth earnings come from pharmacy benefit management, software and consulting — revenue sources which are not as subject to the risk of legislative changes.
And although the health insurance industry is subject to some political risk, its revenues do not fluctuate as wildly from quarter to quarter as other sectors.
Should You Buy UNH Stock Now?
UnitedHealth may be in a more favorable position than its competitors, and is probably one of the better health insurance stocks to own.
But now may not be the best time to be loading up on stocks. The markets have just experienced the strongest post-election rally since JFK. A correction may be underway, which would hopefully present a better buying opportunity.
As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.
