UnitedHealth's Healthy Quarter

UnitedHealth Group (NYSE: UNH  ) reported solid but preliminary fourth-quarter results yesterday -- preliminary, because the health-care provider is still unclear about how it should account for its prior stock-option abuses. This Fool still thinks time is the best medicine for this otherwise well-run business.

As for the fourth quarter, revenues were $18.16 billion, slightly below analyst estimates of $18.23 billion. Year-over-year comparisons are not meaningful, since the company made the significant PacifiCare acquisition in late 2005. Operating margins for the quarter increased to 11%, helped by the seasonality of Medicare Part D, which lowered the medical loss ratio (MLR). The MLR is analogous to cost of goods sold for other businesses. UnitedHealth used a non-GAAP presentation to normalize the seasonality of Medicare D. The normalized 81.4% MLR for the fourth quarter was more in line with the full year's 81.2% ratio.

On the negative side, there was an increase in the MLR specific to the UnitedHealthcare segment. While no trend has been established yet, any signs that the commercial MLR is increasing could hamper future profitability and subsequent cash flows, especially given the cyclical nature of the business. However, even with the increased overall MLRs, the company is still generating significant cash flows.

Cash flow from operations was $1.6 billion for the quarter and $6.5 billion for the year. (A free cash flow estimate is unavailable, since a cash flow statement wasn't provided.) Because UnitedHealth is unable to use its excess cash for share buybacks until it's current with the SEC, the health insurer also benefited from increased investment income due to the growing cash balance. Moving forward, the challenge will be to maintain operating cost and underwriting disciplines so that these cash flows remain healthy.

If UnitedHealth, under the leadership of CEO Stephen Hemsley, begins achieving its 2007 targets, I think the company will manage just fine and investors will begin to look forward, not backward. With the diversity of UnitedHealth's operations both geographically and across business types, the company should be able to navigate the upcoming challenges, such as California's new proposed universal health-care plan, better than most of its smaller peers such as Aetna (NYSE: AET  ) and Cigna (NYSE: CI  ) .

For related Foolishness:

UnitedHealth is both a Stock Advisor and an Inside Value recommendation. A free trial to either newsletter is available by clicking the aforementioned links.

Fool contributor Matthew Crews welcomes your feedback -- really! He has no financial position in any of the companies mentioned. The Motley Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 520250, ~/Articles/ArticleHandler.aspx, 10/23/2016 2:20:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:01 PM
UNH $145.37 Up +0.30 +0.21%
UnitedHealth Group CAPS Rating: ****
AET $111.25 Up +0.32 +0.29%
Aetna CAPS Rating: ***
CI $124.18 Up +0.55 +0.44%
Cigna CAPS Rating: ***