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UnitedHealth (UNH) Up 3.6% Since Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for UnitedHealth Group Incorporated UNH. Shares have added about 3.6% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

UnitedHealth Beats on Q3 Earnings

UnitedHealth Group reported third-quarter net operating earnings per share of $2.66, comfortably beating the Zacks Consensus Estimate of $2.57 and increasing 22.6% year over year.

Higher revenues, strength in both its segments, UnitedHealthcare and Optum, and membership growth led to the outperformance.

UnitedHealth has a tradition of guiding conservatively and then beating its own estimates to surprise investors. The company surpassed expectations in 25 out of 28 reported quarters and the quarter under review was no exception.

Behind the Headlines

UnitedHealth posted net revenues of $50.3 billion, in line with the Zacks Consensus Estimate. Revenues were up 8.7% year over year. The company reported medical care ratio of 81.4%, up 110 basis points year over year.

Operating cost ratio of 14.7% was down 50 basis points year over year.

Strong Segment Performance

In the reported quarter, the company’s health benefits segment
UnitedHealthcare reported revenues of $40.7 billion, up 9.6% year over year. Earnings from operations increased 14.3% year over year to $2.4 billion.

Revenues from Optum improved 8.4% year over year to $22.9 billion, reflecting strong contribution from subsegments OptumHealth and OptumInsight as well as OptumRx. Earnings from operations surged 15.7% year over year to $1.7 billion.

Continued focus on accelerating growth as well as improving margins and productivity through enhanced integration and business alignment led to the overall improvement of this segment.

Membership Enrollment Surges

The company’s medical enrollment grew to 49 million from 48.1 million in the year-ago quarter.

Capital Position Improves

Cash and short-term investments at quarter end were $19.8 billion, up 49% from the 2016-end level.

Debt-to-total capital ratio decreased to 38.2% at Sep 30, 2017 from 41.3% at Jun 30, 2017.

Cash flows from operations were $7.4 billion, up 117% year over year.

Guidance Update

Encouraged by its strong earnings performance, the company raised its outlook for 2017 earnings. The company now expects 2017 GAAP net earnings to approach $9.45 per share (versus $9.20 to $9.35 per share earlier) and adjusted net earnings to near $10.00 per share (versus previous guidance of $9.75-$9.90).

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been two revisions higher for the current quarter compared to one lower. While looking back an additional 30 days, we can see even more upward momentum. There have been five moves higher compared to three lower in the last two months.

UnitedHealth Group Incorporated Price and Consensus

 

UnitedHealth Group Incorporated Price and Consensus | UnitedHealth Group Incorporated Quote

VGM Scores

At this time, UnitedHealth's stock has a strong Growth Score of A, though it is lagging a lot on the momentum front with a D. The stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for value and growth investors.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.


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