UnitedHealth Group Inc. (UNH): Earnings Analysis

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UnitedHealth Group Inc. (UNH): Earnings Analysis

UnitedHealth Group Inc. (NYSE:UNH) reports preliminary financial results for the quarter ended 2012-09-30.

UnitedHealth Group Inc. (NYSE:UNH) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com. We analyzed UnitedHealth Group Inc. (NYSE:UNH) in-depth in July; you can read our blogs on fundamental analysiscorporate actions, dividend quality, and earnings quality.

UnitedHealth Group Inc.’s analysis versus peers uses the following peer-set: AFLAC INC. DL -,10 (FRA:AFL), WellPoint, Inc. (NYSE:WLP), Aetna Inc. (NYSE:AET), Cigna Corporation (NYSE:CI), Sun Life Financial Inc. (TSE:SLF) and Humana Inc. (NYSE:HUM). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2012-09-30 2012-06-30 2012-03-31 2011-12-31 2011-09-30
Revenues 27,302.0 27,266.0 27,285.0 25,918.0 25,284.0
Revenue Growth % 0.1 (0.1) 5.3 2.5 0.2
Net Income 1,557.0 1,337.0 1,388.0 1,258.0 1,271.0
Net Income Growth % 16.5 (3.7) 10.3 (1.0) 0.3
Net Margin % 5.7 4.9 5.1 4.9 5.0
ROE % (Annualized) 20.9 18.4 19.6 18.2 18.7
ROA % (Annualized) 8.6 7.3 7.9 7.3 7.4

Valuation Drivers

UnitedHealth Group Inc.’s current Price/Book of 2.0 is about median in its peer group. UNH-US’s operating performance is higher than the median of its chosen peers (ROE of 19.2% compared to the peer median ROE of 15.7%) but the market does not seem to expect higher growth relative to peers (PE of 10.8 compared to peer median of 9.4) but simply to maintain its relatively high rates of return.

The company’s capital efficiency (capital turns i.e.revenue/equity of 3.7x) and net profit margins of 5.1% are both median for its peer group. UNH-US’s net margin continues to trend upward and is now similar to its five-year average net margin of 4.8%.

Economic Moat

The company enjoys both better than peer median annual revenue growth of 8.2% and better than peer median earnings growth performance 11.0%. UNH-US currently converts every 1% of change in annual revenue into 1.3% of change in annual reported earnings. We view this company as a leader among its peers.

UNH-US’s current return on equity is better than its peer median (19.2% vs. peer median 15.7%). However, its return on equity over the past five years has only been around the peer median (18.6% vs. peer median 18.6%). This performance suggests that the company may recently have found some new operational advantages to exploit relative to peers.

Growth & Investment Strategy

While UNH-US’s revenues have grown faster than the peer median (7.8% vs. 4.8% respectively for the past three years), the market gives the stock an about peer median PE ratio of 10.8. This suggests that the market has some questions about the company’s long-term strategy.

UNH-US’s annualized rate of change in equity capital of 10.2% over the past three years is around its peer median of 10.2%. This median investment has likewise generated a peer median return on equity of 18.5% averaged over the same three years. This median return on investment implies that company is investing appropriately.

Earnings Quality

UNH-US’s reported net income margin for the last twelve months is around the peer median (5.1% vs. peer median of 4.9%). However, the company has also recorded a relatively low level of accruals (-0.4% vs. peer median of 6.1%) which suggests possible overstatement of its reported net income.

UNH-US’s accruals over the last twelve months are around zero. However, this modestly negative level is also less than the peer median which suggests some amount of draining of reserves.

Trend Charts

Graph of Revenues Trend for UnitedHealth Group Inc. (NYSE:UNH)
Graph of Revenues Trend for UnitedHealth Group Inc. (NYSE:UNH)
Graph of Net Margin Trend for UnitedHealth Group Inc. (NYSE:UNH)
Graph of Net Margin Trend for UnitedHealth Group Inc. (NYSE:UNH)
Graph of Accruals Trend (% revenues, Quarterly) for UnitedHealth Group Inc. (NYSE:UNH)
Graph of Accruals Trend (% revenues, Annual or TTM) for UnitedHealth Group Inc. (NYSE:UNH)

Company Profile

UnitedHealth Group, Inc. provides health care coverage, software and data consultancy services. The company operates through four business segments: UnitedHealthcare, OptumHealth, OptumInsight and OptumRx. The UnitedHealthcare segment includes UnitedHealthcare Employer & Individual, UnitedHealthcare Medicare & Retirement and UnitedHealthcare Community & State. UnitedHealthcare Employer & Individual offers a comprehensive array of consumer-oriented health benefit plans and services for large national employers, public sector employers, mid-sized employers, small businesses and individuals nationwide. UnitedHealthcare Medicare & Retirement provides health and well-being services to individuals age 50 and older and offers a wide spectrum of Medicare products, including Medicare Advantage plans, Medicare Part D prescription drug coverage and Medigap products that supplement traditional fee-for-service coverage, which may be sold to individuals or on a group basis. The UnitedHealthcare Community & State segment provides solutions to states that care for the economically disadvantaged, the medically underserved, and those without benefit of employer-funded health care coverage in exchange for a monthly premium per member from the applicable state. The OptumHealth segment provides health services business serving the broad health care marketplace, including payers, care providers, employers, government, life sciences companies and consumers. Optum helps improve overall health system performance. It is organized into three segments: optimizing care quality, reducing costs and improving the consumer experience and care provider performance. Optum is organized in three segments: OptumHealth focuses on health management and wellness, clinical services and financial services, OptumInsight delivers technology, health intelligence, consulting and business outsourcing solutions and OptumRx specializes in pharmacy services. The OptumInsight segment is health information, technology, services and consulting company providing software and information products, advisory consulting services, and business process outsourcing to participants in the health care industry. Hospitals, physicians, commercial health plans, government agencies, life sciences companies and other organizations that comprise the health care system work with OptumInsight to reduce costs, meet compliance mandates, improve clinical performance and adapt to the changing health system landscape. The OptumRx segment OptumRx provides a multitude of pharmacy benefit management (PBM) services. PBM services and manages specialty pharmacy benefits across nearly all of UnitedHealthcare’s businesses, as well as for external employer groups, union trusts, managed care organizations, Medicare-contracted plans, Medicaid plans and TPAs, including for pharmacy benefit services, mail service only, rebate services only and network services. It also provides claims processing, retail network contracting, rebate contracting and management and clinical programs, such as step therapy, formulary management and disease/drug therapy management programs to achieve a low-cost, high-quality armacy benefit. UnitedHealth Group was founded in January 1977 and is headquartered in Minnetonka, MN.


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