UnitedHealth Beats Q2 Earnings on Revenue Rise, Revises View

Zacks

UnitedHealth Group Inc. (UNH) reported second-quarter 2014 operating earnings of $1.42 per share, handily beating the Zacks Consensus Estimate of $1.25. This also compares favorably with the year-ago earnings of $1.40 per share.

The earnings outperformance was driven by higher revenues but partly offset by a higher tax rate.

Quarter in Detail

Total revenue of $32.6 billion increased 7.2% year over year. The revenue figure also surpassed the Zacks Consensus Estimate of $32.0 billion. The year-over-year increase in total revenue was primarily attributed to an increase in people served in the public and senior markets at UnitedHealthcare as well as strong growth in the pharmacy business at Optum.

Total operating cost came in at $30.0 billion, 7.2% higher year over year due to higher medical operating cost and an increased cost of product sold. Medical cost which constitutes the major portion of operating cost also increased 6% year over year to $23.5 billion.

UnitedHealth’s total medical membership declined 65,000 year over year to 44.9 million members during the quarter. While the number of people served grew in the public and senior sectors and internationally, commercial enrolment declined.

Consolidated operating margin came in at 7.8%, down 10 basis points from the year-ago quarter.    

Segment Details

The company’s UnitedHealthcare segment which provides health care benefits, reported revenues of $30.1 billion, up 6% year over year. The improvement was led by an increase in the number of people served in public and senior sector, price increases and higher revenue from federal and state-based benefit programs.

Earnings from operations remained unchanged at $1.8 billion. Operating margin of 6.1% declined 30 basis points year over year due to the effects of the Affordable Care Act.   

Optum’s revenues of $11.7 billion rose 28% year over year, primarily on strong contribution from its sub-segment Optum Rx. Earnings from operations grew 23% year over year to $728 million.

Financial Update

UnitedHealth’s balance sheet shows strength, with more than $1 billion of cash available. Debt to total capital ratio at 33.7% as of Jun 30, 2014, declined 90 basis points year over year.  

During the quarter, UnitedHealth Group instituted a 34% hike in its annual dividend to $1.50 per share. It also renewed the 100 million share repurchase program.   

Guidance Reaffirmation

UnitedHealth upped its revenue guidance to $130.0 billion from its previous guidance of $128.0 billion to $129.0 billion. Management also tightened its earning per share forecast to a range of $5.50 to $5.60 per share from $5.40 to $5.60.

UnitedHealth continues to project 2014 cash flows from operations in the range of $7.8 billion to $8.2 billion.  

Our Take

The quarter’s result reflected strong performance by the company, irrespective of the challenges posed by the Heath Care Reform Act. Going forward, we expect UnitedHealth to continue delivering positive surprises as it executes on providing innovative responsive services to its customers.

UnitedHealth carries a Zacks Rank # 4 (Sell). Better-ranked stocks include Molina Healthcare, Inc. (MOH), WellCare Health Plans, Inc. (WCG) and Aetna Inc. (AET). While Molina and WellCare sport a Zacks Rank #1 (Strong Buy), Aetna carries a Zacks Rank # 2 (Buy).

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