UnitedHealth Poised For Growth Despite Increasing Competition

On Jul 20, 2016, we issued an updated research report on UnitedHealth Group Incorporated (NYSE:UNH) .

UnitedHealth’s second-quarter 2016 earnings per share beat the Zacks Consensus Estimate and improved year over year on higher revenues. Solid performance at health services business Optum, and membership increase also contributed to the outperformance.

UnitedHealth leverages core competencies in advanced technology-based transactional capabilities through its diverse operations in healthcare and well being. Through Optum, its health services business, the company covers almost every aspect of health and wellness management.. This business is highly profitable and currently contributes 42% of UnitedHealth’s total revenue. Optum is on track to achieve significant growth and meet performance targets for this year.

UnitedHealth’s commendable Medical member base reflects its leading market position across all private health insurance segments of North and South America. The company has grown its membership by 40% over the past five years. Its well diversified operations across commercial, government programs as well as international offerings reflect its competitiveness. In order to mitigate the risks associated with stringent and increasing U.S regulations, the company remains focused on expanding its operations worldwide, mostly through overseas acquisitions.

The Zacks Rank #3 (Hold) company boasts a strong balance sheet. This, in turn, helps it to consistently engage in efficient capital deployment through share repurchases, mergers, dividend increases or other similar strategic moves.

However, the company’s weak debt-to-capital ratio raises concerns. Also, the company remains exposed to stiff competition with the same intensifying pending mergers of medical sector giants like Anthem Inc. (NYSE:ANTM) , Cigna Corp. (NYSE:CI) and Humana Inc. (NYSE:HUM) . Also, UnitedHealth plans to shut down its exchange business in 2017 as rising forex regulations puts pressure on profitability. The company has already reduced its marketing efforts for individual insurance policies sold on exchanges for 2016.

UnitedHealth experienced a low level of medical care over the past couple of years. This resulted in reduced medical claim costs and increasing profits. However, management expects a return to more normalized medical utilization trends soon, which will wipe out the extra earnings benefit that the company had been enjoying so far.

The commercial business, which accounts for one third of the company’s operating margin, has not been as profitable as expected. The shift in Group Employer benefits moved to the subsidized Public and Private Exchanges is likely to have been the primary reason behind the underperformance.

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