UnitedHealth Group Inc (NYSE:UNH), the giant health insurer, beat the street on April 17 and raised estimates, illustrating its dominance in the healthcare space.
The company earned $2.924 billion, $3.04-per-share fully adjusted, on revenues of $55.188 billion. This handily beat estimates for $2.92-per-share of earnings, and whispers of $2.97-per-share, on revenues of $54.85 billion.
The top line represented year-over-year growth of 13.3%, as the company added 2.2 million new customers. The company bumped its yearly profit guidance by about 50 cents, and now projects it will earn $12.40 to $12.65-per-share for the year.
The result is a big gain for UNH shareholders. The stock rose to $6.04-per-share, 2.69%, in anticipation of earnings, and added another $4.19, 1.82%, in pre-market trading. In the last year the stock has gained nearly 50% in value.
Beautiful Numbers
UnitedHealth’s “moat,” the advantages that make it a powerful investment, are technology and size. UNH, which is based in Minnetonka, MN, a suburb of Minneapolis, was a big buyer of technology in the last decade, built around the Optum brand.
Optum has even higher margins than the parent company, and it is rapidly expanding into front-line services, recently buying the DaVita Medical Group, a dialysis organization, for $4.9 billion.
UnitedHealth’s sheer size often lets it outbid competitors with cheaper plans given comparable deductibles, even though it pulled out of the individual market in 2016 and is no longer part of the “Obamacare” health exchanges, after closing an experimental group called Harken Health. It’s still very active in the Medicare arena, however, through so-called “Medigap” policies sold through a network that includes the American Association of Retired Persons (AARP).
UNH’s bargaining power keeps winning it big group contracts. Its Community & State group saw a revenue rise of 19.2%, despite losing the business of the state of Delaware. Its global group grew 29.2% year-over-year, acquiring a South American health insurance group, Empresas Banmedica.
Today UnitedHealth has a 15.5% share of the health insurance market, more than double that of its nearest competitor, Aetna Inc. (NYSE:AET) (Full disclosure. My own health insurance is handled by UnitedHealth.)
UNH results have greatly accelerated since it bought Catamaran, a pharmacy benefit manager, in 2015. Catamaran gives it more control over its drug costs, and the move has since been copied by competitors at a high premium. Most recently Cigna Corp. (NYSE:CI) said it would buy the largest such company, Express Scripts Holding Co. (NASDAQ:ESRX) of St. Louis, for $67 billion, including debt. Amazon.com, Inc. (NASDAQ:AMZN) has also backed away from a plan to sell drugs to hospitals against Optum.
The Bottom Line
Despite its spectacular rise, UNH stock may still be a bargain. If it hits the top of its estimated earnings range, $12.65-per-share, the price-to-earnings ratio even at the April 17 opening price is just 18. During the quarter the company bought back $2.65 billion in stock and put $722 million into dividends, of 75-cents-per-share.
The outlook, meanwhile, keeps getting better. The Administration’s efforts to gut the Obamacare exchanges have no impact on UnitedHealth, since it dropped that business almost two years ago. Its ability to price group plans profitably is unparalleled, given its sheer size in relation to competitors, and its unparalleled vertical integration. Optum has become a major profit center, going beyond electronic health records into front-line services.
Small wonder that all but three of the 23 analysts following UnitedHealth stock have it on their buy lists.
It should be on yours, too.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
