UnitedHealth's 4Q in a Postive Tone - Analyst Blog

Health insurance bellwether United Health Group Inc. (UNH) reported its fourth quarter core operating earnings of 94 cents per share, four cents ahead of the Zacks Consensus Estimate of 90 cents per share. Earnings also compares favorably with $0.81 per share reported in the prior-year quarter. Results were aided by strong performance in the Health Benefits segment as well as Health Services segment.

UnitedHealth, the largest publicly traded health insurer based on total revenue, reported higher total revenue of $24.03 billion up 10.0% year over year and also above the Zacks Consensus Estimate revenue of $23.8 billion. The increase in revenue was generated primarily by a double-digit surge in revenues in UnitedHealthcare Medicare & Retirement, UnitedHealthcare Community & State, Ingenix and Prescription Solutions units.  

Full year EPS of $ 4.10 surpassed the Zacks Consensus Estimate of $3.99.  Revenues of $ 94.16 billion came in a tad higher than management's forecast of $94 billion and was up 8% year over year. It also compared favorably to the Zacks Consensus Estimate of $93.7 billion.

Medical cost ratio came in at 77.9%, down by 130 basis points year over year, benefiting from favorable prior-year development, lower medical utilization and solid cost management. Though the company is limiting its spending of premium revenue on medical costs as compared with the last year, such expenses have come under regulation in 2011, under the Patient Protection and Affordable Care Act, which will, in turn, hit the bottom line to some extent.  

Operating costs came in at $4.1 billion or 17.0% of revenues, up 130 basis points year over year due to greater cost related to quality improvements and health care reform.

Health Benefits which accounts for the maximum percentage of the company's revenues and serves through UnitedHealthcare, Ovations and AmeriChoice, reported a 9.9% year-over-year increase in revenues to $22.20 billion. The increase in the segment came due to a growth in membership in Medicaid and Medicare Advantage (government programs), coupled with an increase in commercial enrollment.  

OptumHealth reported revenue of $1.51 billion, which increased 5.6% year over year. Operating earnings of $155 million represented a 5.5% decrease. This earnings decrease was driven by a margin decline of 120 bps to 10.3%, which reflected growth in lower margin public sector businesses, new market development and startup costs, costs related to the implementation of Mental Health Parity legislation.

Ingenixreported revenues of $715 million, which increased 33.3% year over year, primarily due to strong consulting services for care providers and payers and strong business process outsourcing services. Ingenix's operating earnings in the quarter increased 36.5% to $101 million. Ingenix' management expects meaningful growth related to health information and technology spending over the next few years. Specifically, the company believes Ingenix is comfortably positioned to take advantage of growth in electronic medical records, comparative effectiveness research, health information exchanges and connectivity, information security and physician performance and payment accuracy solutions

Prescription Solutions reported revenue of $4.3 billion, an increase of 13% year over year, primarily due to growth in customers served and related higher prescription volumes. 

UnitedHealth has been generating strong cash flow from operations, which increased 12.5% year over year to $6.3 billion for the year. The debt-to-capital ratio decreased to 30.1% from 32.1% as of December 31, 2010, further strengthening the company's financial flexibility.

Management is optimistic about strong membership retention along with business growth led by a series of acquisitions made recently to add to revenue growth. It expects revenues of $100 billion up 6.2% year over year and earnings per share in the range of $3.50 to $3.70.

Peers like WellPoint Inc., (WLP) is scheduled to report earnings on Jan. 27, followed by Cigna Corp. (CI) on Feb. 3, Aetna Inc. (AET) on Feb. 4 and Humana Inc. (HUM) on Feb. 7.

UnitedHealth carries a Zacks Rank # 2 which translates into a 'Buy' recommendation over the short term (1-3 months). However, over the longer term (6+ months) we hold a 'Neutral' recommendation for the shares.

 
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