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UnitedHealth's Stock Down in 1H19: What Lies Ahead in 2H?

Zacks Equity Research

Health insurer leader, UnitedHealth Group, Inc.'s UNH shares have declined in the first half of 2019, though its operating profitability is expected to have improved. The downside is likely to have been caused by regulatory noise.

The stock fell in response to Joe Biden’s plan of ‘Medicare-for-All’ to reform the healthcare system in the United States, which would render the private health insurance useless.

Also, the stock suffered due to the recent executive order signed by the Trump administration to make price disclosure of services and products offered by hospitals. Any such disclosure would also unveil the contract negotiations between insurers and hospitals. The administration also wants to make medical providers and insurers give their patients estimates of out-of-pocket costs before they get care.

Due to these regulatory disturbances, the stock declined 2%  in the first half of the year, compared with the industry’s loss of 0.3%.

Now, since these regulations, are just in the discussion phase with no real implications on the company’s operations, the stock price fluctuation is not reflective of its performance.

In the first quarter of 2019, the company’s top line and bottom line have grown 9.2% and 22.7%, respectively, year over year.

For the second quarter, analysts’ estimates suggest an earnings per share growth of 0.5% on revenue increase of 8.17%.

Recently, the company announced internal leadership changes, which might pave the way for CEO succession to keep its wheels moving at full speed in the right direction.

The company’s second quarter results are likely to witness revenue gains from higher membership in Commercial Risk, Medicare as well Medicaid, which accounts for 23%, 34% and 18%, respectively, of the total revenues.

In its Optum segment, revenue contribution is expected from OptumCare’s large medical practices growth through value based care and medical cost management; OptumInsights’ growing Individual Health Record (IHR), which are used to provide solutions and services to different players of the healthcare system.Optum Rx’s pharmaby benefit business is already performing solidly, and this should continue to through the acquisitions of Avella and Genoa.

The company also expects cash flows in the second half to be above the last year’s figure and double-digit growth in cash from operations in 2019.

The company’s inherent business strength along with wide presence across different business verticals is likely to boost the stock price.

Thus, this recent decline presents a good opportunity to take positions in the stock whose valuation at the current levels looks fair.

The stock’s forward 12-month price-to-earnings ratio is 15.64, which is below its five-year median of 17.05. Also, the level looks fair in comparison to the industry’s P/E ratio of 14.57 as the company deserves a premium valuation owing to its unmatched business profile.

UnitedHealth carries a Zacks Rank #3 (Hold). Few better-ranked stocks in the same space are Well Care Health Plans, Inc. WCG, Molina Healthcare, Inc. MOH and The Joint Corp. JYNT. While Molina Health sports a Zacks Rank #1 (Strong Buy), The Joint Corp. and Well Care Health carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Molina Healthcare and Well Care have surpassed earnings estimates in each of the four reported quarters with an average positive surprise of 88.17% and 13.52%, respectively.

The Joint Corp. beat estimates in two of the four reported quarters with an average positive surprise of 190%.

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