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UnitedHealth sees strong quarter after ObamaCare exit

July 13, 2017

Amid the health-care chaos on Capitol Hill, UnitedHealth Group Inc. shareholders can breathe a sigh of relief: The company has already left many of the Affordable Care Act’s exchanges.

For that reason and others, Mizuho Securities analyst Sheryl Skolnick expects a strong second quarter from the company UNH, -0.03%  , calling it “the one to own.” Skolnick rates UnitedHealth — scheduled to report second-quarter earnings Tuesday before the bell — a buy with a price target of $200, compared with the company’s share price of $186.69 as of Wednesday’s close.

Investors and Wall Street analysts are watching UnitedHealth’s Optum health-care services arm, which they believe should drive growth for the company.

“The key here is the long-term growth of Optum, OptumCare and our strong view that UNH is the leading agent of change in health care, driving the transformation from a broken system to a modern, effective and efficient patient-centered, value-based model of health care payment and delivery,” Skolnick said.

 

Hopes are also high for the company’s managed care business, since managed care organizations have done well in prior quarters.

Credit Suisse named UnitedHealth among its top managed care picks, which also include Cigna Corp. CI, -0.06%  , Aetna Inc. AET, -0.01%  and Humana Inc.HUM, +0.05%  , and raised the company’s price target from $195 to $200.

“The 2Q17 earnings season should bring fundamentals back to the forefront from the ongoing ACA replace debate in Washington,” said Credit Suisse analyst Scott Fidel, adding the caveat that “the market already largely expects the [managed care organization] ‘beat and raise’ cycle to continue in 2Q and there is quite a bit of optimism reflected in current valuations.”

Also of interest is the company’s pharmacy-benefits manager Optum Rx, which recently had a “significant” win: the New Jersey state contract, with an estimated annual spend of $2 billion, from rival pharmacy-benefit manager Express Scripts Holding Co. ESRX, +0.02%  , said Leerink Partners analyst Ana Gupte.

 

The contract poses a 0.5% to 1% upside to UnitedHealth’s 2018 consensus, Gupte said, and follows other contract wins, including General Electric and California public employees health insurance provider CalPERS.

“Optum Rx’s solid track record of contract win supports our view that captive PBMs… will continue to win share from standalone PBMs and/or expand margins through re-contracting” Gupte said, reiterating an outperform rating on UnitedHealth with a $210 price target.

Here’s what to expect:

Earnings: Analysts expect UnitedHealth to report earnings of $2.38 per share, up from $1.96 per share in the year-earlier period, according to FactSet. UnitedHealth has beat the FactSet earnings consensus in all but one quarter over the last five years.

The software platform Estimize, which crowdsources estimates from buy-side and sell-side analysts, hedge funds, academics and others, has the company earning slightly more, or $2.41 per share.

 

Revenue: Analysts expect UnitedHealth to report revenue of $50.1 billion, up from $46.5 billion in the year-earlier period, according to FactSet. UnitedHealth has beat the FactSet consensus in every quarter over the last three years.

Estimize has UnitedHealth earning more, or $50.3 billion.

Stock reaction: UnitedHealth shares have risen 12.4% over the last three months, compared with a 4.9% rise in the S&P 500 SPX, +0.19%  .

The company’s average rating is buy with a $195.48 price target, according to a FactSet poll of Wall Street Analysts.

What to watch for: Despite UnitedHealth’s exit from most of the ACA exchanges, the GOP effort to repeal and replace the ACA could still affect the company, including through such things as taxes, said Mizuho’s Skolnick.

“Political/health policy risks could be significant and future national health policy remains highly uncertain,” she said.

Other risks include missteps in estimating cost trends and other actuarial calculations and in the Optum services business, Skolnick said.

The company could be affected by reimbursement and regulatory risks, although “the timing and extent of such changes are usually out of the company’s control and therefore could represent exogenous events with negative earnings and stock price implications,” she said.

Pressure on UnitedHealth’s medical-loss ratio, or the amount of a premium that health insurers spend on improving quality, could also be an important factor, said Credit Suisse’s Fidel.

UnitedHealth is also being investigated by the Justice Department over its Medicare risk adjustment practices.

 

Drug pricing pressure could also affect UnitedHealth’s pharmacy-benefit manager business, as could losing customers, Fidel said.

http://on.mktw.net/2ujOQgy

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