UnitedHealth Poised To Grow Via Optum, Axes Exchange Loss

On Aug 23, 2016, we issued an update research report on health insurer UnitedHealth Group Inc. (NYSE:UNH) .

The company a leader in the health insurance industry has been faced with losses on the individual exchange business conducted via public exchange which drained earnings in 2015. The same continued in the first half of 2016. Therefore, to protect its profitability, the company has exited most of the public exchanges it was present in. For 2017, the company intends to be present on only three or less exchange markets compared with its 34-market presence in 2016. This will save the company from the loss that this business would have incurred.

The company is instead focusing on investing and growing its health services business branded as Optum. The segment has been growing rapidly over the past several quarters and the same trend has been seen this year too. First-half 2016 earnings from Optum operations exceeded $2.3 billion, up 47% year over year. Management continues to expand this segment and last year’s acquisition of Catamaran along with other acquisitions made in the recent past are efforts taken toward this direction. The acquisitions have been fruitful as witnessed by the revenue accretion from them. Optum is becoming an increasingly valuable business and accounts for about 42% of UnitedHealth Group’s consolidated operating earnings outlook for this year.

Over the past five years, UnitedHealth has also grown membership by nearly 13.5 million, or 40%, well diversified across commercial, government programs and international offerings. The company’s membership is further set to grow in the Medicare Advantage, Medicaid as well as commercial plans.

UnitedHealth also carries a strong balance sheet and generates handsome cash flows which allow it to increase dividend payments and make regular share buyback.

UnitedHealth carries a Zacks Rank #2 (Buy). Other stocks in the space with the same Zacks Rank are The Joint Corp. (NASDAQ:JYNT) , WellCare Health Plans, Inc. (NYSE:WCG) and Nobilis Health Corp. (NYSE:HLTH) .