Earnings Preview: UnitedHealth Group - Analyst Blog
October 17 2011 - 12:02PM
Zacks
UnitedHealth Group Inc. (UNH) starts off the
earnings season for managed care companies with its 3Q 2011
earnings on October 18, 2011. The Zacks Consensus estimate for the
quarter stands at $1.12 which translates into an earnings growth of
12.12% year over year.
We believe earnings will continue to disclose improving
performance from its health benefits and rapidly growing health
services businesses. Lower medical utilization is also expected to
be a major tailwind for earnings.
Previous Quarter Performance
UnitedHealth’s second quarter earnings came in at $1.16 per
share, substantially ahead of the Zacks Consensus Estimate of 93
cents. The results also soared from 99 cents in the prior-year
quarter.
The strong results were primarily supported by strong revenue
growth from UnitedHealthcare, as well as from its Optum businesses
which gained from enrollment and low medical utilization. Share
repurchases leading to a lower weighted average diluted share count
also augmented operating results.
UnitedHealth reported revenue of $25.23 billion in the quarter,
up 8.5% year over year.
Earnings Estimate Revisions: Overview
Prior to the results release, earnings estimate inched up
marginally to $1.12 per share from $1.11 over the last 7 days. The
increase though marginally indicates strength in the stock.
We provide below the details of earnings estimate revisions to
substantiate investor optimism in the stock.
Agreement of Estimate Revisions
Though a handful of analysts, only 4 out of 19 covering the
stock, have pulled up their estimates for the third quarter over
the last 7 days and also for the past 30 days, it is quite clear
that analysts are in agreement with the bullish third-quarter
earnings outlook for UnitedHealth, given the absence of any
downwards estimate earnings revision.
Moreover, for FY11 and FY12, five and two of the total 21
analysts for both the periods, respectively, have raised their
estimates over the last 7 days and also over the past 30 days.
The upward revisions prove that the analysts are in agreement
with the company’s above-the-line earnings expectations. Analysts
expect the company to beat the estimates on the back of rational
pricing, moderating flu trends, adequate reserves along with an
increase in enrollment.
Magnitude of Estimate Revisions
The Zacks Consensus Estimate for the third quarter inched up
modestly to operating earnings of $1.12 per share from $1.11 over
the last 7 as well as last 30 days. Also, estimates for FY11 edged
upward from earnings per share of $4.35 to $4.37. For FY12,
estimates went up to $4.79 from $4.78 per share to $4.61.
Though the magnitude of estimate revisions was very small, the
absence of any negative estimates indicates the analysts’ optimism
in the stock.
Earnings Surprise
UnitedHealth has been throwing positive earnings surprises over
the trailing four quarters with the average earnings surprise of
positive 26.70%. This implies that the company has beaten the Zacks
Consensus Estimate by the same magnitude over the last four
quarters.
Our Take
We are upgrading our recommendation for UnitedHealth to
Outperform from Neutral just before the release of the third
quarter earnings as we believe that the company would beat the
Zacks Consensus estimate as Medicare and Commercial costs continue
to remain at historical lows amid the sluggish economy.
UnitedHealth Group is one of the most diversified of the listed
managed care companies. With a broad product and service offering,
the company targets the entire population.
As a result,earnings are buffered to a certain degree against
any single unfavorable change in market dynamics at the divisional
level. This is evidenced by the growth in the company’s revenues
for the past five years. Though the market remains challenging, we
expect the company to grow revenues, albeit at a slower rate.
With impressive operating cash flows, aggressive share
repurchase, low leverage, UnitedHealth is a long-term value stock
for investors.
UnitedHealth is well positioned among its peer group as it has the
ability to diversify its earnings stream. Given its diversity and
soundness of operations, the company is well positioned to handle
the challenges of the health care reform.
Currently UnitedHealth carries a Zacks #1 Rank, which translates
into a short-term ‘Buy’
recommendation.
Peers, WellPoint Inc. (WLP) is expected to
report third-quarter results on Oct. 26 and Aetna
Inc. (AET) the following day. Humana Inc.
(HUM) reports its earnings Oct. 31, and Cigna
Corp. (CI) announces results on Nov. 3.
AETNA INC-NEW (AET): Free Stock Analysis Report
CIGNA CORP (CI): Free Stock Analysis Report
HUMANA INC NEW (HUM): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
WELLPOINT INC (WLP): Free Stock Analysis Report
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