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UnitedHealth Outlook Grim, Shares Down

Zacks Equity Research

Shares of UnitedHealth Group Inc. (UNH) continued to trend downward over the past two days, after the U.S. health insurance major provided an initial constrained 2014 earnings outlook on Dec 2. The company gave detailed guidance on components forming the earnings the next day, which reflected a number of headwinds related to Affordable Care Act (:ACA) facing the company in 2014. Shares lost 1% of its value over the past two days, closing at $73.73 on Dec 3.

The company expects 2014 earnings in the range of $5.40–$5.60 per share, which remains below the Zacks Consensus Estimate of $5.66 per share.  However, the Zacks Consensus Estimate might see a downturn when the analysts revise their estimates to accommodate the company's concerns. The insurer maintained a limited near-term upside to 2014 earnings, reflecting headwinds related to ACA.

The insurer expects 5% year over year increase in 2014 revenue to $128–$129 billion, which lags the Zacks Consensus Estimate of $132.6 million. Bottom-line earnings are expected to witness a lower increase of about 1% due to $1.1 billion after-tax reform impact. Strong top line growth will be marred by ACA compliance costs. Top–line growth in 2014 is expected to come primarily from Optum segment, expected to see 19% revenue growth, compared with 4% revenue growth in UnitedHealthcare segment.  Bottom-line earnings in UnitedHealthcare segment are expected to decline by 15%, compared to an increase of 31% at Optum which will lead to overall earning increase of just 1% year over year, to 5.40–$5.60 per share from $5.40–$5.50 per share in 2013. The Zacks Consensus Estimate for 2013 earnings is $5.49 per share.

Operating cost ratio is expected to increase to 16.7% from 16.0% in 2013 led by an increase in ACA fees and change in business mix.

For 2013, the company reiterated its revenue guidance of $122.3 billion which translates into year-over-year growth of approximately 11%.  The Zacks Consensus Estimate is almost in line with the company's expectation. Revenue increase will primarily be driven by 26% growth from revenue from Optum segment. Operating earnings are however, expected to increase by 3% year over year to $9.6 billion, with major share contributed by Optum segment, expected to witness a 55% jump in operating income.  

As far as enrollment growth is concerned, the company expects 2013 membership increase of 3070,000 in Commercial benefits, 885,000 members to increase in Public and Senior benefits and increase of 465,000 members in its International business. For 2014, enrollment is expected to be in the range of 45 billion members to 45.7 billion members. Membership growth in government sponsored and international markets is expected to be offset by commercial market declines.

Company guidance indicates that fundamental outlook for the company’s Health benefits business is being challenged on account of a combination of ObamaCare headwinds in the Commercial and Medicare segments. Optum, however, is the jewel in the company’s crown, offering sustainable growth and upside in double digits. UnitedHealth has, however, had a tradition of guiding conservatively and then beating its own estimates to surprise investors.

Another player, Aetna Inc. (AET) also provided a constrained 2014 earnings outlook during third quarter results, stating that 2013 earnings of $5.80-5.90 would mark the minimum starting point for 2014 earnings, though upside out-performance might be limited. Yet another player Humana Inc. (HUM) expects a fall in earnings next year, led by spending on the new health exchanges and on the Medicaid program.

UnitedHealth carries a Zacks Rank #3 (Hold). A better ranked stock CIGNA Corp. (CI) with Zacks Rank #2 (Buy) in the same industry is worth considering. 

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