UnitedHealth Earnings: Is UNH Stock a Buy After Earnings?

UnitedHealth Group (UNH) reported fourth-quarter earnings this morning before the markets opened. Its earnings whisper heading into the Q4 announcement was $1.45 per share, five cents higher than the consensus estimate. It missed its whisper number by four cents but beat the consensus estimate by a penny at $1.41 per share.

UNH-stock-unitedhealth-stockWhat does today’s report mean for UNH stock and healthcare stocks in general? I’ll have a closer look. While UnitedHealth earnings appear solid and my initial reaction is very positive, I’ll try to uncover anything that might hold back UNH stock.

Q4 Earnings UNH Stock

UNH’s Q4 revenue grew 8.2% year-over-year to $31.1 billion while its earnings per share jumped 17.5% to $1.41. For the entire year, revenues and earnings per share were $122.5 billion and $5.50 respectively. CEO Stephen Hemsley had this to say about the company’s quarter: “In 2013 the quality and diversity of our products and services across the health care system — and the distinctive value received from those services — drove exceptional growth.”

Hemsley’s comments underscore the strength of the business. Perhaps no number characterizes this more than its organic enrollment of more than 4.5 million people in 2013. Also making a difference in 2013 was its Optum segment, which saw revenues grow by 26% to $37 billion with operating earnings of $2.3 billion — a 61% increase over last year.

Optum made a major contribution to its growth in 2013, which is a big positive for its business going forward. However, the company’s guidance of $128 billion to $129 billion in revenue for 2014 and an EPS forecast ranging from $5.40 to $5.60 suggest the company is still quite uncertain about the Affordable Care Act and its effect on UnitedHealth earnings and consequently UNH stock.

What This Means for UNH Stock

Way back in April 2013 I discussed what the uncertainty regarding the ACA would mean for healthcare stocks. I believed that uncertainty meant opportunity for UNH stock and many of the other health insurers. At the time, UnitedHealth had just announced its Q1 earnings. Very pessimistic about its 2014 earnings, Hemsley felt that funding cuts to Medicare Advantage plans along with rising medical costs would hurt its profitability. Nine months later, we see that coming to roost.

Given the current operating environment, I think it’s fair to say that, despite its consolidated operating margin declining by 50 basis points in 2013 to 7.9%, UNH is doing an admirable job keeping the ship upright. In fact, its 60-basis-point increase in Q4 operating margins to 7.9% is an indication that UNH will be able to handle whatever the ACA throws its way.

Sure, UnitedHealth is only calling for flat earnings in 2014, but that’s clearly a conservative projection. Last year at this time it released Q4 2012 earnings with an outlook for EPS between $5.25 and $5.50. It beat the top of the range by 10 cents. Throw in share repurchases of $3 billion or so — which would reduce the share count by 30-40 million — and it shouldn’t have a problem besting $5.60 per share come next January.

Time to Buy/Sell UNH Stock?

Nuveen Asset Management together with Incapital introduced an equity unit trust on Jan. 13 that will hold 25 equity securities picked from the Russell 1000 based on Nuveen chief equity strategist Bob Doll’s 10 predictions for 2014. With a 15-month investment horizon through April 10, 2015, UNH stock is one of the lucky 25. In fact, seven healthcare stocks were chosen for the portfolio.

Today’s earnings announcement, combined with this high conviction portfolio from Bob Doll suggests now is as good a time as any to own UNH stock. However, I wouldn’t bet the farm — UNH has had five consecutive years of gains and is due for an off year at some point.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2014/01/time-buysell-unh-stock/.

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