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UNH Beats Estimates, Ups Guidance

Zacks Equity Research

UnitedHealth Group Inc. (UNH) has kicked off the earnings season today for the health insurance sector by reporting first quarter earnings of $1.31 per share, substantially higher than the Zacks Consensus Estimate of $1.16. Earnings also compared favorably with $1.22 per share reported in the prior-year quarter.

The outperformance can be attributed to strong revenue growth at UnitedHealthcare, higher revenues from the Optum businesses, and strong enrollment growth, partially offset by higher operating costs.

The largest publicly traded health insurer (based on total revenue) posted revenues of $27.3 billion, an increase of 7.5% year over year, and up by a modest 0.4% compared to the Zacks Consensus Estimate of $27.2 billion. The increase was led by higher premiums and higher product revenue in the health benefits business (UnitedHealth Care), coupled with strong revenue growth from the service segment.

UnitedHealth’s medical costs went up 6.4% year over year to $19.9 billion. Total operating costs increased 7.3% year over year to $25.0 billion, led by growth initiatives undertaken in the pharmacy benefits business.

Segment performance

During the quarter, UnitedHealth’s health benefits segment named UnitedHealthcare witnessed revenue growth of 7.0% year over year to $25.5 billion. Earnings from operations grew 9% to $2.1 billion.

The company’s other segment, the health services segment branded as Optum, witnessed a growth of 7.4% year over year to $7.3 billion. The company is aggressively expanding this segment as a means to diversify its earnings. It expects Optum to contribute more than 30% of the earnings mix.

Membership Enrollment

UnitedHealth, the second-largest insurer after WellPoint Inc. (WLP) based on enrollment, showed strong enrollment trends, as membership increased sequentially across all major business lines. Total commercial enrollment was up 2.3% sequentially, and up 3.3% year over year.

Medicaid grew 1.8% sequentially and 5.9% year over year, whereas Medicare Advantage grew 11.4% sequentially and 15.2% year over year. The company expects membership growth in the range of 1.7 million –1.9 million for fiscal 2012, higher than the earlier forecast of 750,000 members.

Capital Position

UnitedHealth continues to maintain a healthy balance sheet, ending the quarter with a debt-to-capital ratio of 31%, though slightly higher than 29% in the last quarter. Days sales outstanding were 9 days, unchanged relative to the prior-year quarter. Days claims payable (:DCP) were 47 days, up 1 day year over year.

Share Repurchases

Historically, repurchases and acquisitions have been one of the most prevalent uses of capital for the company. During the quarter, the company bought back 18.5 million shares at a total cost of $1.0 billion.    

2012 Guidance Affirmed

Backed by better-than-expected earnings, management raised its fiscal 2012 earnings estimates to a range of $4.80 – $4.95 from the earlier guidance range of $4.55 – $4.75. It also revised its revenue estimates upwards, in the range of $109 billion – $110 billion from the previous revenue guidance range of $107.0 billion – $108.0 billion. The company expects cash from operations in the range of $6.2 billion – $6.5 billion. 

 Our Take

 During the quarter the company was awarded the TRICARE west contract to serve military service members. The contract gives the largest U.S. health insurer (on the basis of revenue) access to the military health care market, one of the areas that the company has been looking to penetrate for a while now. 

The company also announced its decision to purchase Florida-based Preferred Care Partners and Medica HealthCare Plans, to strengthen its Medicare Advantage business. It also completed the acquisition of XLHealth Corporation to serve the emerging dual eligible population.

Coming back to the quarter’s results, UnitedHealth has been performing very well with continuous revenue as well as membership growth. We remain bullish about its prospects going forward, given the proactive measures adopted by the company to align itself with the changing market scenario, in the face of the Health Care Reform.

The company is diversifying across businesses, products as well as geographies and has taken several strategic initiatives in the regard. A low reliance on debt, a solid capital position along with healthy cash flow generation will allow the company to undertake strategic growth initiatives.

UnitedHealth generally sets the tone for the performance of other health insurers. Following the strong results of the health insurer major, we expect favorable performance from its peers Aetna Inc. (AET), CIGNA Corp. (CI), WellPoint , and Humana Inc. (HUM), all of which are slated to release their first quarter earnings soon.

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