Earnings Preview: UnitedHealth Group Inc. and Stryker Corp.

UnitedHealth Group and Stryker Corp. are set to release second quarter earnings this week. Here's what you need to know.

George Budwell
George Budwell
Jul 15, 2014 at 5:00PM
Health Care

When the Affordable Care Act, or ACA, was being debated, many health care executives resoundingly condemned the legislation because they believed it would hurt private insurers, decrease innovation by reducing profit-based incentives, and make health care generally more expensive. And even a cursory look at the recent earnings reports for most health care companies operating in the private insurer or medical device segments would suggest that this argument wasn't entirely wrong-headed.

In an odd twist of fate, however, most of these same companies have seen their share prices soar to 52-week and even all-time highs, even as net profits have steadily declined since the ACA became law.

UnitedHealth Group (NYSE:UNH) and Stryker (NYSE:SYK) are two top health care names that have been directly affected by the ACA, but have seen their share prices move higher nonetheless. With both companies expected to release second quarter earnings this week, let's consider the key issues that investors should pay attention to going forward. 

UNH Chart

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UnitedHealth Group set to report on Thursday before the bell
UnitedHealth will host a conference call at 8:45 a.m. EDT on July 17 to discuss its second quarter operations. Wall Street is expecting earnings per share of $1.26 on $32 billion in revenue.

While these projections would represent a decent 5.3% increase in revenues year over year, earnings are expected to essentially come in flat, compared to the same period a year ago, due to the new costs imposed by the ACA.

A central theme that investors should pay attention to this quarter is United's plans for handling its falling margins since the ACA was implemented. According to the company's first-quarter earnings release, the dramatic reduction in margins observed across the board were due to nondeductible insurance taxes, ACA prescribed Medicare Advantage funding pullbacks and commercial underwriting changes associated with the ACA.

And perhaps as a result of its falling margins, HealthGroup has significantly underperformed its peers such as Aetna and WellPoint in terms of earnings growth and share price appreciation. Aetna, for instance, is projected to post double-digit growth in earnings this year and its stock has responded in kind, pushing higher by nearly 21% year to date. 

Turning to HealthGroup's main growth driver, investors should definitely keep a close eye on the performance of the company's Health Services Platform known as Optum. The platform has provided the bulk of revenue growth for the company of late, with a healthy 29% increase in revenues year over year, per the first quarter numbers. That being said, Optum's operating margins also fell by 0.4% in the first quarter compared to the same period a year ago, making it an important issue to watch out for next Thursday.

Stryker to announce earnings Thursday after the bell
Stryker will host its earnings call at 4:30 EST on July 17. Heading into the release, the Street is expecting earnings per share to come in at $1.08 on $2.35 billion in revenue.

Breaking this down, Stryker is expected to grow earnings per share by 8% and revenue by 6.2% year over year. That being said, the company's recent acquisition of Pivot Medical for its hip arthroscopy products should have an impact on the bottom line this quarter. 

Unlike many companies focusing on medical devices and products, Stryker is seeing decent top and bottom-line growth due to its aggressive acquisition strategy. As a refresher, Stryker acquired Mako Surgical to obtain access to its Robotic Arm Interactive Orthopedic System last year and has made a handful of additional, albeit smaller, deals this year to gain access to key surgical assets.

Prior to obtaining these new products this year, Stryker was already expected to increase earnings per share next year by close to 10%. So investors should listen closely on the upcoming conference call to management's plans regarding how these newer assets will create value moving forward and their potential impacts on the bottom line. 

Foolish wrap-up
Despite UnitedHealth and Stryker both bumping up against their 52-week highs lately, I think Stryker is more likely to continue moving higher than UnitedHealth. Going forward, I suspect that second quarter earnings might be a dividing point for these two stocks. Specifically, UnitedHealth is struggling with its bottom line in the new ACA environment, where some of its peers are actually flourishing. Stryker, on the other hand, has shown a penchant for gobbling up novel products that are helping it create top-line growth in this tough regulatory and political climate.