UnitedHealth's Obamacare Shun, Recent Deals, Make It Attractive for the Future

Shares of UnitedHealth are up nearly 22% year-to-date.
By Armie Margaret Lee ,

Not to be deterred by the cost pressures of Obamacare, UnitedHealth Group (UNH) - Get Report unveiled second quarter results that beat analysts' expectations for both the top and bottom line, partly driven by a more than 50% increase in services revenue.

"We remain positive on UNH as our top Health Services pick after a solid and conservative 'Beat & Raise' quarter that offers meaningful room for upside in 2H16 and 2017," wrote Leerink Partners analyst Ana Gupte in a Tuesday note. Gupte has an outperform rating on the stock and a price target of $155.

Shares of UnitedHealth closed at $142.99 on Wednesday, up 0.28%, The stock is up around 21% year-to-date.

Optum, UnitedHealth Group's health services business that serves payers, care providers, employers, governments, life science companies and consumers, had revenue of $20.6 billion, up 52% year-over-year. Optum includes health and wellness business OptumHealth, health care information, technology, operational services and consulting business OptumInsight and pharmacy care services provider OptumRx.

A majority of Optum's revenue came from OptumRx, which generated $15.1 billion. The 69% year-over-year increase in OptumRx's revenue was driven by acquisitions and organic growth.

UnitedHealth completed its $12.8 billion acquisition of pharmacy benefits manager Catamaran in July 2015 and combined it with its OptumRx business. In November, OptumRx acquired AxelaCare Health Solutions, a provider of home infusion solutions, from private equity firm Harvest Partners for an undisclosed sum.

Sterne Agee CRT analyst Brian Wright wrote in a note in May that the Catamaran purchase is "bearing large fruits," pointing to PBM contracts awarded to OptumRx, including a five-year contract worth an estimated $4.9 billion in which OptumRx will serve as PBM to the California Public Employees' Retirement System.

CalPERS announced in May it was replacing CVS Health (CVS) - Get Report , whose contract expires at yearend, with OptumRx.

In a note on Tuesday, Wedbush Securities analyst Sarah James pointed to the CalPERS contract win"as evidence Optum is emerging as a leading competitive PBM, getting their share of rfp opportunities." James added that she could see United "further leveraging market disruption... to gain further share."

The disruption James is referring to could come in the form of CVS and Express Scripts (ESRX) , another large player in the PBM space, "lose their largest customers in the next few years." CalPERS for instance, used CVS as its PBM until recently signing a deal with UNH.

Minnetonka, Minn.-based UnitedHealth reported second quarter adjusted net earnings per share of $1.96, up 13% from the year-ago period. Analysts had forecast $1.89, according to Bloomberg. Revenue increased 28% year-over-year to $46.5 billion, surpassing analysts' estimates of $45.04 billion.

James said "low SG&A and strong Optum results offset higher exchange costs" as she reiterated her outperform rating on the stock and $165 price target.

In UnitedHealth's first quarter earnings call in April, CEO Stephen J. Hemsley said the company plans to "remain in only a handful" of Affordable Care Act-compliant individual markets in 2017.During Tuesday morning's Q2 earnings call, Hemsley said: "That effort is on track -and we do not expect any meaningful financial exposure on 2017 business from the three or fewer exchange markets where we currently plan to remain."

In the earnings release, the company said the consolidated medical care ratio rose 30 basis points to 82% in the second quarter of 2016 "and included more than 50 basis points or approximately $200 million of additional full year losses from ACA-compliant individual products above previous projections and fully absorbed within second quarter results."

UnitedHealthcare, which provides healthcare benefits, had revenue of $37.6 billion, representing a rise of 14% from the year-ago period.

UnitedHealth Group narrowed its outlook for 2016 GAAP net earnings to a  range of $7.25 to $7.40 a share, and adjusted net earnings to a range of $7.80 to $7.95 a share. The company previously gave a range of $7.20 to $7.40 a share for 2016 GAAP net earnings, and a range of $7.75 to $7.95 a share for adjusted net earnings.

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