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UnitedHealth Group (UNH) reported first quarter 2011 net earnings of $1.22 per share, well ahead of the Zacks Consensus Estimate of 89 cents.

Earnings also compare favorably with $1.03 per share reported in the prior-year quarter. Net earnings increased 13% year over year to $1.3 billion in the quarter.

Results were aided by strong revenue growth from UnitedHealthcare as well as from Optum businesses.

Operational Update

UnitedHealth reported revenue of $25.43 billion in the quarter, increasing 9.7% year over year. Results also surpassed the Zacks Consensus Estimate of $24.96 billion.  The increase in revenues was brought primarily by a double-digit surge in revenues at UnitedHealthcare Community & State, OptumHealth and OptumInsight.

Operating costs increased 10% year over year to $3.6 billion. The medical cost ratio came in at 81.4%, increasing 10 basis points year over year.

Operating income totaled $2.2 billion, up 10% year over year.

UnitedHealthcare revenues increased 9% year over year to $23.87 billion in the first quarter 2011. The improvement was due to increase in the number of members served.

Operating earnings improved 12% year over year to $1.9 billion with operating margin expanding 30 basis points to 8% benefiting from cost containment measures.

OptumHealth reported revenues of $1.5 billion, increasing 37% year over year driven by expansion in clinical services and strong consumer growth in population health management products sold to payers and plan sponsors.

Operating earnings of $109 million represented a 24% year-over-year decrease. This earnings decrease was driven by a margin decline of 60 bps to 7.2%, which reflected costs related to the implementation of Mental Health Parity legislation, internal business realignments and revisions to service arrangements and continued investments in new market development and growth.

Optuminsight (formerly Ingenix) reported revenues of $671 million, which increased 33% year over year, primarily driven by organic growth and contributions from recent acquisitions.

Operating earnings in the quarter increased a whopping 57% year over year to $83 million.  Operating margin improved by 190 basis points to 12.4%, reflecting an increased level of higher margin product and solution sales and favorable first quarter operating costs.

OptumRx (formerly Prescription Solutions) reported revenue growth of 13% year over year to gross $4.6 billion, driven by growth in people served and prescription volumes.

Operating earnings at OptumRx remained flat year over year at $130 million. Higher revenues were offset by costs to support growth initiatives.

Financial Update

UnitedHealth ended the first quarter with cash and short-term Investments of $12.2 billion, up 8.5% form 2010 end.

Long term debt increased 8% from the 2010 level to total $9.4 billion at quarter end.

Operating cash flows in the quarter under review totaled $1.2 billion, up 1.6% year over year. Capital expenditure increased a considerable 61% year over year to $213 million in the first quarter of 2011.

Share Repurchase

In the first quarter of 2011, UnitedHealth spent $620 million to buy back 15 million shares.

2011 Guidance

UnitedHealth expects revenues to be approximately $101 billion.

UnitedHealthcare revenue is projected between $94 billion to $94.5 billion; OptumHealth revenue is projected between $6.2 billion to $6.4 billion; OptumInsight revenue is seen at $2.5 billion to $2.7 billion; and OptumRx revenue is expected at about $18.6 billion to $19.0 billion.

UnitedHealth projects operating earnings to be in the range of $7.2 billion to $7.5 billion.

The company also guided net earnings in the range of $3.95 to $4.05 per share. Cash flow from operations is estimated to be $5.8 billion to $6.2 billion.

UnitedHealth expects to spend $2 billion to $2.5 billion in repurchasing shares.

Our Take

UnitedHealth remains well positioned with strong performances across its businesses with continuous investments to develop its product offerings. The company continues to enhance shareholders' value through dividend payment and share repurchases. Also, UnitedHealth Group remains focused on catering to the growing market demand to provide quality care at affordable prices.

We maintain a “Neutral” recommendation on UnitedHealth Group over the long term. The quantitative Zacks #3 Rank (short-term ''Hold' rating) indicates no clear directional pressure on the stock over the near term.

Headquartered in Minnesota, UnitedHealth Group Inc., through its diversified businesses, leverages core competencies in advanced technology-based transactional capabilities, health care data, knowledge and information, and health care resource organization and care facilitation to improve access to health and well-being services, simplify the medical experience, promote quality and make health care more affordable. It competes with Aetna Inc. (AET) and WellPoint Inc. (WLP).

 
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