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UnitedHealth Finishes 2015 Strong

By Dan Caplinger - Jan 19, 2016 at 9:40AM

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The health insurance giant overcame Obamacare-related costs to post solid growth.

Image source: UnitedHealth.

Health insurance has become a must-have item for every American, and that has presented an opportunity to industry leader UnitedHealth Group (UNH 0.12%). Unlike rival Anthem (ANTM 1.73%), which jumped into the state healthcare exchanges under the Affordable Care Act, UnitedHealth took a more measured approach that has led it to some controversial conclusions about the profitability of its policy offerings under Obamacare. Coming into Monday's fourth-quarter financial report, UnitedHealth investors were prepared for lower profits but wanted to see clear signs of revenue growth. Investors got more than they bargained for, with the company besting forecasts and projecting a solid year ahead. Let's look more closely at how UnitedHealth did to close out 2015 and what's ahead in 2016.

UnitedHealth stays well
UnitedHealth's fourth-quarter results continued to impress investors. On the sales front, UnitedHealth continued to climb, with revenue of $43.6 billion up more than 30% from year-ago figures, outpacing the $43.2 billion top line that most had expected to see. Net income went in the wrong direction, falling 17% to $1.25 billion. But even that produced adjusted earnings of $1.40 per share, and that was $0.02 higher than the consensus forecast among investors.

A closer look at UnitedHealth's numbers showed some interesting trends. The company said that it suffered losses on one state Medicaid contract as well as several individual exchange-compliant products under Obamacare. After further adjusting for those losses, earnings of $1.77 per share for the quarter were up from last year's $1.64 per share. In addition, exchange-compliant policies also pressured UnitedHealth's medical care ratio, which climbed to 82.7% in the fourth quarter.

UnitedHealth continued to grow its customer base. Overall, the company served 129 million people, up from just 88.5 million at the end of 2014. Growth in the UnitedHealthcare division was more measured, but with 49.4 million customers, the unit has still seen gains of 1.4 million people in the past year.

Beneath the surface, though, UnitedHealth's two major segments went in opposite directions. For UnitedHealthcare, revenue gains were limited to just 8%, and operating earnings plunged by 45%. The global business was again weak, reflecting currency issues from its Brazilian operations, but overall, the health-insurance unit saw operating margins cut in half.

By contrast, Optum continued to soar. Revenue jumped 70% to $21.9 billion, and operating earnings for the segment rose by 46%. The Catamaran acquisition continue to show up in the results of the OptumRx prescription drug unit, but solid gains in the OptumHealth and OptumInsight areas also helped support the business.

UnitedHealth was quite happy with the year's performance. CEO Stephen Hemsley pointed to "continuing strong growth as we enter the new year," and Optum's role in that growth has clearly been a key component of UnitedHealth's strength.

Can UnitedHealth get healthier?
UnitedHealth's look ahead to 2016 was similarly optimistic. The company still expects earnings of $7.60 to $7.80 per share on revenue of more than $180 billion, continuing its growth track upward. Operating cash flows should also grow substantially, with guidance in a range of $9.5 billion to $10 billion.

One tailwind for earnings growth has kept slowing, and although the move is deliberate, investors should keep it in mind. UnitedHealth once again slowed its pace of share repurchases in the fourth quarter, buying back just 600,000 shares and spending roughly $60 million to $65 million for the quarter. In a that year the insurer repurchased 10.7 million shares and spent $1.2 billion in doing so, the slowdown has been significant.

Yet the more important strategic decision involves what UnitedHealth will do with Obamacare. The company has said publicly that it is considering pulling out of state exchanges because of the losses it has racked up. Yet Anthem's aggressive stance in embracing the exchanges has been surprisingly successful for the insurer, with its government business bringing in more than half of its overall revenue. Anthem has argued that embracing Obamacare could lead to growth across its business because it could lead to higher scale generally and more attractive propositions for large employers. Like UnitedHealth, Anthem has blamed Obamacare for narrower profits, but it thinks it can cut expenses over time.

UnitedHealth shareholders were generally pleased with the news, sending the stock up more than 1% in pre-market trading following the announcement. Many investors will look forward to UnitedHealth's decision on Obamacare, hoping that the health insurance giant can find a path forward that will allow it to make the most of the profit opportunity.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Anthem and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

UnitedHealth Group Incorporated Stock Quote
UnitedHealth Group Incorporated
$537.26 (0.12%) $0.66
Anthem, Inc. Stock Quote
Anthem, Inc.
$483.97 (1.73%) $8.25

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