In the Q2 conference call, Stephen Hemsley made it clear that UnitedHealth Group (NYSE:UNH) --that 1,000-pound-gorilla of the healthcare insurance world-- is still in the pink of health. At least in management's view.
UNH's management focused heavily on the positive this quarter.
The rise was in stark contrast to the reaction just a quarter ago, when the tone was a lot more downbeat. Management concern and comments about the Obamacare overhang and pricing pressure from the new hep-C treatment (Gilead's Sovaldi) left some investors so underwhelmed they dumped not only UnitedHealth's stock, but temporarily fled the whole managed care sector.
This time, good news came often and early. After the company reported better-than-expected Q2 earnings, it promptly raised guidance.
"We are raising our 2014 revenue outlook to $130 billion from the previous forecasts of $128 billion to $129 billion. We are strengthening our 2014 earnings projection to a tighter range of $5.50 to $5.60 per share." -- Stephen Hemsley, CEO
I'm all in favor of letting winners run, and UnitedHealth is up 10% since the beginning of the year, not to mention being a stellar long-term performer.
What investors really need to hear from management is whether this stock will recapture its growth edge in the future. No one has a crystal ball, but conference call highlights may indicate whether the good times will keep rolling.
Optum drove the upside
"In the second quarter, Optum's revenues grew 28% to $11.7 billion. Earnings from operations grew 23% year-over-year to $728 million.... Optum remains on pace to contribute roughly 1/3 of UnitedHealth Group's 2014 cash flows from operations." -- Stephen Hemsley
Optum has been a huge success for UnitedHealth. The Optum business line includes OptumHealth (which provides physician solutions and population health management support), OptumInsight (consulting and tech support services), and OptumRx (a pharmaceutical benefit manager -- or PBM).
Optum is a huge, fast-growing opportunity for UNH, and one that bears close watch by investors.
UnitedHealth's carnival in Brazil continues
"In our view, Brazil remains the most fertile market for health benefits and services outside the U.S. and we expect our focus and efforts in this large, high potential market will reward our shareholders for years to come." -- Stephen Hemsley
UnitedHealth's majority purchase of Brazilian health insurance provider Amil in 2012 gave UnitedHealth a platform to move into international markets. According to the conference call, the company is continuing to build out franchises in Rio and São Paulo. Brazil is a sizable market under-penetrated by medical, dental, and clinical services companies and is a huge growth opportunity.
We're entering more exchanges and expect to take a large part of our competitors' business
"In the individual market, we plan to grow next year as we expand our offerings to as many 2 dozen state exchanges. This approach is consistent with our long stated plan to take a prudent first-year position and then build and expand in 2015 and 2016 as these markets become more established." -- Stephen Hemsley
UnitedHealth's caution with the exchanges caused it to enter only a handful of individual health insurance exchanges this year. The company now expects to up that total to as many as twenty-four in 2015.
Enrollment in the exchanges is at 8 million and the Congressional Budget Office expects that number to cross over 20 million within three years. As the United States implements an overhaul of its entire healthcare system, UnitedHealth is in the position of having to recapture customers taken by competitors such as WellPoint, Centene, and Molina Healthcare.
How UnitedHealth plans to recover lost ground wasn't made clear in the conference call. Undercutting the competition on pricing is problematic. With a roughly 6% operating margin in the UnitedHealthcare segment, pricing will need to stay very disciplined. The firm's medical loss ratio also increased slightly to 81.6%, although management said they expected that to lessen and average 81% for the entire year.
A few final words from the conference call and Mr. Hemsley:
"To summarize, the first half of the year was strong with revenues growing by $3.5 billion or 6% year-over-year. First half earnings of $2.52 per share position us positively for the full year growth. With a strong second half growth performance from Optum and seasonal strength in UnitedHealth's, second half operating margins, expected to help accelerate our earnings and bring us to a strong close."
Things are gonna get brighter?
The answer to that question really depends on how the company's tactics play out. As mid-term elections approach and Obamacare continues to evolve, the firm's cautious "watch and learn" tactics may prove brilliant. But right now, UnitedHealth has some serious profitability, pricing, and competitive pressures to contend with.