AET Aetna Inc. (delisted)

On Monday, through a brief press release, health insurer UnitedHealth Group Inc. (UNH) announced its earnings outlook for the full year 2012. The company expects the earnings to be in the range of $4.55 to $4.75. It also affirmed its 2011 full year guidance of $4.52 to $4.57.

While the upper range of UnitedHealth’s 2012 earnings guidance is in tune with the Zacks Consensus Estimate, its 2011 guidance is meeting the Zacks Consensus Estimate of $4.55, at the midpoint range.

UnitedHealth, the largest insurer on the basis of revenue, also expects its 2012 revenues in the range of $107.0 billion to $108.0 billion, up approximately 6.5% from the 2011 revenue guidance of more than $101 billion. The 2012 EPS guidance reflects a 2.2% of year-over-year increase (calculated at the mid-point range).

We expect the company to easily achieve the targets based on its strong operating fundamentals. In fact, UnitedHealth has had a tradition of guiding conservatively and then beating the estimates to surprising investors.

The latest guidance does not include any earnings accretion from UnitedHealth’s recent acquisition of XL Health Corp., neither does it incorporate any estimate of cost from the pending Penn Treaty matter. However, as management previously commented that the acquisition is slated to close in the first half of 2012, and is expected to add to EPS, we will not be surprised to see the company delivering substantially better-than-expected results.

Other factors that are expected to boost 2012 earnings include:

Leading position in the Medicare business: UnitedHealth enjoys a high exposure in the Medicare market, which is expected to boom in the coming years as million of Americans will enter the retirement age. Moreover, with the acquisition of XLHealth, the company will further strengthen its position in the MA market, compelling long-term growth. 

Fast-growing Health Services segment: This business, branded under the name Optum, boasts of higher margin and is a very important part of the company’s diversification strategy. For the nine months ended September 30, 2011, the segment delivered approximately 18% growth. Now with the expansion of the health service business, management expects the revenue contribution to approximately double over time.

Strong balance sheet: The insurer enjoys a solid balance sheet with adequate financial flexibility and a favorable debt ratio, which helps it make decisions on acquisitions easily. Moreover, UnitedHealth has opted for shareholder-friendly measure for managing capital such as dividend payment and buying back shares. Last year, the company raised its dividend to 50 cents from 3 cents, making it the biggest hike in the industry.

However, some of the factors that may partially offset the above positives include higher than expected medical cost and weaker membership enrollment.  

Among UnitedHealth’s peers, Aetna Inc. (AET) and Humana Inc. (HUM) also provided guidance for 2012. Aetna expects earnings to be at least $4.80 per share, while Humana sounded more specific, guiding 2012 EPS in the range of $7.40 to $7.60 per share.

UnitedHealth currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. However, considering the fundamentals, we are maintaining our long-term Outperform recommendation on the shares.

 
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