by Jin Wu
UnitedHealth Group Inc. (NYSE: UNH), one of the nation’s biggest health issuers, reported higher profits in both the fourth quarter and the full year that topped analysts’ estimates as revenues increased in Optum, its healthcare management technology and consulting division, and its public and senior sector. Its stock climbed 3.5 percent.
The company earned $1.51 billion, or $1.55 per diluted share attributable to common shareholders, in the quarter ended December 31, up 5.8 percent from $1.43 billion, or $1.41 per diluted share attributable to common shareholders, in the year-earlier quarter. The diluted EPS beat the $1.50 analysts’ estimates compiled by Bloomberg.
In the fourth quarter, revenues increased 7.4 percent to $33.4 billion from $31.1 billion.
For the 2014 fiscal year, UnitedHealth’s net income dropped 0.95 percent to $5.62 billion from $5.67 billion as operating costs, primarily in the health care sector, increased 6.5 percent to $120.2 billion. However, earnings per diluted share attributable to common shareholders increased 3.6 percent to $5.70 from $5.50 compared with 2013, topping the company’s guidance range of $5.60 to $5.65 per share.
Full year 2014 revenues were $130.5 billion, up 6.5 percent from $122.5 billion.
In 2014 UnitedHealth repurchased $4 billion of stock, and its return on equity exceeded 17 percent.
UnitedHealth said the Affordable Care Act (ACA) negatively impacted its full year earnings from operations by $1 billion or approximately $1.00 per share because the company’s 2014 tax rate of 41.8 percent increased 540 basis points year-over-year due to ACA taxes.
Strong growth in the company’s Optum division in 2014 balanced the decline in its commercial healthcare sector. Optum’s revenue grew to $47.4 billion, up 25.2 percent from $38.1 billion, with fourth quarter revenues up 24 percent to $12.9 billion, as Optum’s operating margin expanded to 6.9 percent for the full year and 8.1 percent in the fourth quarter.
“The fourth quarter was exceptionally strong with earnings growth of 53 percent [in Optum],” said Stephen J. Hemsley, CEO of UnitedHealth Group, in a conference call with analysts and investors. “It was also something of a milestone, surpassing $1 billion in operating earnings in a single quarter for the first time.”
UnitedHealth’s Community & State programs also had strong growth in 2014,its revenue increasing 29 percent to $23.6 billion.
The company projects its current quarter earnings to decrease sequentially from the last quarter; but it expects the second quarter to rise sequentially and a smoother progression in the third and fourth quarters than in 2014.
“I think the whole managed-care sector is experiencing a rotation of value buyers,” said Thomas A Carroll, managing director and analyst at Stifel, Nicolaus & Co. Inc. “Those investors are rotating out and new investors are rotating in. It will pressure the stock in the first quarter.”
UnitedHealth estimates 2015 revenues will grow at a high single digit rate to a range of $140.5 billion and $141.5 billion, and projects earnings growth potentially reaching double digits to the upper end of a range of $6.00 to $6.25 per share.
Carroll said, “Its performance [in Q4 and year 2014] is better than I expected. I think it digested the Afforded Care Act very well. The outlook it provided is very realistic and conservatively casted. I think the company appears to be pricing conservatively given cost hot spots like hepatitis C drugs.”
Optum may still be the strong element, according to Hemsley, in boosting UnitedHealth’s revenue in the current fiscal year. “In 2015, earnings [of Optum] are on pace to triple since we embarked on the Optum growth initiative a few short years ago,” he said.
Carroll stated in a research report, “In our view, Optum earnings are estimated to contribute ~50 percent of total EPS by 2016. Additionally, spending headwinds are expected to subside and, among other items, support accelerating Optum earnings. So we reiterate our ‘Buy’ rating and increase our target price to $125.”
Despite the increased costs in the health care sector in 2014, the company projects it will return to earnings growth in 2015. “We’ve grown organically by more than 8 million people in the past five years. We should grow to serve over a million more people in 2015, continuing UnitedHealthcare’s track record as the fastest-growing health benefit company in the nation,” said Hemsley. “We are confident UnitedHealthcare is positioned for continued growth including revenue growth of 6 percent to 7 percent in 2015.”
UnitedHealth Group is the first of the major U.S. health insurers to report fourth-quarter financial results. Anthem Inc. and Aetna Inc. are scheduled to follow in the next two weeks.
The stock closed at $109.32, up $3.7 or 3.5 percent.