We are reiterating our Neutral recommendation on the shares of
UnitedHealth Group Inc.
). Though we are bullish on the company's long-term growth
prospects, there remain certain headwinds, such as high
unemployment, growing medical cost, pressure from Health Care
overhaul, which might keep the earnings under check in the near
UnitedHealth is one of the biggest and most diversified health
insurers in the U.S. It holds a huge market share in the Medicare
market, which is expected to boom in the coming years as million of
Americans will enter the retirement age. The company has made a
number of acquisitions (most significant of which is the purchase
of XL Health Corp.) to further strengthen its position in the MA
market, resulting in long-term growth.
UnitedHealth's health service business is a very important part
of the company's diversification strategy. Management is
considering the expansion of the health service business to produce
30%-40% of operating income over the longer term and has been
making acquisitions in the area. It believes the company is
under-penetrated in the health service area and that investment in
this field will reap benefits over the long term.
UnitedHealth is also expanding its business internationally. It
has made an agreement with Dubai-based Al Sagr National Insurance
Co. to expand in the Middle East. Geographical
diversification features prominently in the company's plan of
action as the Health Care Reform imposes a lot of restrictions back
in the U.S. Over time we expect more deals from the company,
pertaining to its international expansion where it faces less
The company has also been growing its membership over the past
couple of years. It added 2.6 million consumers with medical
benefits over the past two calendar years. It introduced additional
1.7 million people in the second quarter 2012, and we expect the
trend to continue.
Factors offsetting the positives include higher operating costs
from investment in ICD-10 and health reform, higher utilization as
well as low investment income.
UnitedHealth is witnessing increased operating costs due to high
medical and operating cost pressures related to the Affordable Care
Act and Mental Health Parity Act. The company will also face
heightened expenses in complying with the federally mandated ICD-10
coding and HIPAA 5010 standards.
Though the company had experience low medical care over the past
couple of years, leading to reducing medical claim cost and
increasing profits management expects return to normalized medical
utilization trends soon, that will wipe out the extra earnings
benefit the company had been enjoying so far.
Low interest rates, which will culminate into low investment
income putting earnings under pressure, are still a major cause of
The company's peers, such as
), are also carrying long-term Neutral recommendation. The stock of
UnitedHealth retains a Zacks #3 Rank, which translates into a
short-term Hold rating.
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