UnitedHealth Group Inc (NYSE:UNH) crushed earnings on Tuesday morning, demonstrating again why UNH stock is the first healthcare stock you should put into any portfolio.
UnitedHealth reported net earnings of $1.76 billion, up 13% year-over-year, on revenues of $46.485 billion, up 28% year-over-year. Meanwhile, the company added 2.1 million new customers.
UNH dominates the U.S. health insurance market. The announced mergers between Anthem Inc (NYSE:ANTM) and Cigna Corporation (NYSE:CI), and Aetna Inc (NYSE:AET) and Humana Inc (NYSE:HUM), are merely efforts to gain something near United’s size and power within the market.
But this underestimates UnitedHealth’s power, and the potential of UNH stock.
Optum Results
UnitedHealth spent the last decade buying health IT companies, eventually forming a powerhouse called Optum. That generated revenues grew 52% year-over-year in this report, to over $20 billion. Technology revenues were up 25% to $1.8 billion, the delivery business called OptumHealth was up 18% to $4.1 billion, and the pharmacy business called OptumRX was up a whopping 69%, mainly on acquisitions, bringing in $15.1 billion in revenue.
UNH has drawn a lot of headlines, deliberately so, claiming it is exiting the Obamacare exchanges but that’s just the preferred provider (or PPO) area of the business. The exchanges have been shown to benefit insurers with limited networks, which can control costs. And during the last year, UNH has created a new subsidiary called Harken Health to serve this market.
UNH Can Benefit From Vertical Integration
The future of the market lies in vertical integration — insurers able to control costs by controlling facilities. And companies that are following this managed care opportunity, starting in the Medicare and Medicaid market, like Centene Corp (NYSE:CNC), are doing quite well.
UNH is one of them, having bought a number of managed care companies during this decade, including XLHealth in 2012.
Still, it’s politically beneficial for UnitedHealth to claim that it is “exiting” Obamacare, that the program is a failure it wants nothing to do with. Meanwhile, UNH is using OptumRX and its managed care units, including Harken Health for the individual market, to gain more power in the model as it continues to expand. Dominant market share in the old employer-paid model should Obamacare be abandoned.
This is an unbeatable proposition. UNH stock is up 170% over the past five years, including nearly 20% so far this year, and the 1.8% dividend yield is modest, but still a decent kicker.
As investors look away from technology, you can expect a firm bid under UNH. It’s the best buy in the space.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
