UnitedHealth Group (UNH) Chief Executive Officer Stephen Hemsley said on today’s 3rd quarter earning’s call that “caution is the appropriate tone” for 2012 as 2012 costs may “trend upwards.” Health insurers as a whole have seen topline growth in 2011 but changing utilization patterns and competition may pressure future margins.
Helmsley also clearly communicated confidence that UnitedHealthcare will finish the year strong.
Our consistent and strong third quarter financial performance was driven by organic growth, careful cost management and continued moderate trends in the level of care utilization along with the benefits of our broader diversification of offerings to the market. We have increased our 2011 earnings outlook to a range of $4.40 to $4.45 per share and revenues exceeding $101 billion.
The forecast is an increase from the previous outlook of $4.15 to $4.25 that was reported in July and, importantly, is made with full recognition of 2012 headwinds of premium rebate obligations, rising healthcare utilization trends along with increased regulatory compliance associated with healthcare reform (PPACA).
While profits were down nearly 5%, EPS beat analyst estimates, Q3 revenue increased 6.8% to $25.3 billion, and enrollment growth looks strong. Total enrollment grew by 220,000 in the quarter, which is in addition to approximately 1 million new enrollees in 2010. Net income was flat and this, along with the cautionary tone for 2012 and drop in profitability seems to have spooked investors leading to a 5-8% share price drop today. These results, however, demonstrate solid growth of premiums and the manageability of the medical cost ratio.
In the big picture, total medical enrollment into UnitedHealthcare’s health benefits segment has been growing at nearly 2% per annum for the last 5 years and has now reached more than 34 million members. This segment offers its services through a network of 730,000 physicians and other healthcare professionals, and 5,300 hospitals. As UnitedHealthcare’s membership base grows, more providers are attracted, allowing UNH to negotiate favorable discounts. In addition, the more providers that join the network, the more attractive UNH is to consumers. Through this strong network effect and diversified business model, UNH will be able to ride out the challenges imposed by near-term headwinds. With a forward P/E of 9.3 and after a drop of 5%-8% today, UNH looks modestly attractive and ~$40 is a nice entry point.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in UNH over the next 72 hours.