Managed-care giant healthy once again
|Long-Term Debt as % of Capital
|52-Week Price Range
||$425.98 - $289.64
Even for UnitedHealth Group ($413; UNH), one of the most consistent longtime growers we cover, the coronavirus pandemic took a bite out of 2020 results. Per-share earnings fell 10% in the September quarter and 35% in the December quarter despite sales growth of at least 7% in both periods, hurt by the costs of coronavirus claims.
But given the company’s surprisingly robust growth in the March quarter (per-share profits up 43%, topping the consensus by 21%) and aggressive expectations for coming quarters, Covid turned out to be a blip. A substantial blip, certainly, but one from which UnitedHealth is recovering. The company’s core business continues to expand, bolstered by a multiyear program of investment in data analytics and technology, and we remain confident in the year-ahead potential of this Buy and Long-Term Buy.
Foundation of confidence
In the March quarter, UnitedHealth added 1 million members via contract wins. Since March, membership has continued to trend higher, helped by a blend of new contracts and acquisitions. Analysts target growth of 10% in sales and per-share profits this year, followed by sales growth of 8% and profit growth of 15% next year. Given UnitedHealth’s recent operating momentum, as well as a string of eight consecutive quarterly profit surprises, we have faith in the managed-care giant’s ability to meet or exceed those targets.
In recent years, UnitedHealth has drawn on its Optum family of businesses to both power top-line growth and fatten profit margins. Optum includes units that provide health care and pharmacy services, but the master key lies with Optum Insight business, which parlays data, analytics, and technology into efficiency gains, lower administrative costs, and in some cases entirely new revenue streams.
Optum accounted for 40% of operating revenue and 45% of operating profits last year, with the rest coming from UnitedHealth’s core insurance businesses. However, Optum’s percentage of profits and sales understates its importance. In recent years, UnitedHealth has internalized many of Optum Insight’s data and tools, allowing for more efficient underwriting. In coming years, UnitedHealth plans to prioritize collaboration and synergy between Optum’s various businesses and the legacy UnitedHealth network. Expect continued improvement in the cost structure as well as the launch of new products and services that blur the line between health services and health insurance.
UnitedHealth has set an internal per-share-earnings-growth target of 13% to 16% a year, with two-thirds of that growth coming from internal expansion and the remaining third via capital deployment, such as acquisitions and share buybacks. Over the last three years, UnitedHealth invested nearly $10 billion in its own stock, reducing the share count 3%, while boosting its dividend at an annualized rate of more than 17%, most recently a 16% hike in June.
UnitedHealth Group Inc., 9900 Bren Road E., Minnetonka, MN 55343, (952) 936-1300, www.unitedhealthgroup.com.
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||23 - 19
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* Earnings exclude special items.
NA Not Available.
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e Dividend and yield estimated.