UnitedHealth Lags the Dow on Obamacare Uncertainty

UnitedHealth beat expectations, but that wasn't enough to keep the stock from dropping and dragging down the Dow.

Travis Hoium
Travis Hoium
Jan 16, 2014 at 3:30PM

The Dow Jones Industrial Average (DJINDICES:^DJI) has fallen 0.45% late in trading after big banks suddenly became a drag on the market. Citigroup and Goldman Sachs reported earnings, and Citi's results fell below expectations while Goldman beat forecasts but posted weak trading results.

As I highlighted yesterday, long-term challenges like rising interest rates and stricter regulations are challenges the banking industry will have to face in the long term. Results from the fourth quarter have been choppy as these factors begin to impact operations, and I don't see any end to the headwinds in the near future.

UnitedHealth starts to see Obamacare hit
UnitedHealth Group (NYSE:UNH) also reported earnings this morning, and while $31.1 billion in revenue and $1.4 billion in earnings were enough to beat expectations, the market sent the stock down 2.3% in today's trading. 

Operating margins for 2013 were down 120 basis points to 6.4%, and the company's medical-cost ratio was up 110 basis points to 81.5%. Both are largely a result of lower Medicare Advantage margins following last year's funding cuts. Management expects to see pressure continue on that side of the business, and that was enough to worry investors. 

The other big question mark for UnitedHealth is how Obamacare's implementation will affect margins in the long term. So far, the company has limited its involvement to three exchanges, including its home state of Minnesota, and competing for individual coverage isn't what UnitedHealth does best. Missing that opportunity could cost it some customers this year, and even where it does win customers, they may not be as profitable as the company has come to expect.

Where UnitedHealth sees an opportunity for growth is in the expansion of Medicaid from Obamacare. This expansion is intended to pull low-income consumers from the uninsured rolls onto private insurance. Management expects growth in this area to drive overall revenue growth this year.

The good news is that UnitedHealth's 2014 outlook of $128 billion to $129 billion in revenue and $5.40 to $5.60 per share in earnings remains intact.

Wall Street doesn't like uncertainty, and depending on how you look at the numbers, health insurers are either doing fine or are under a lot of pressure. Keep in mind that UnitedHealth is continuing to grow each year, and with more customers getting insurance in the U.S., there's upside, even if margins do fall slightly.