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 costs, and pressure from Health
Care overhaul, which might keep the earnings under check in the
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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 enter retirement. 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 an essential 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. Its
acquisition of Brazil-based Amil is sure to bolster its top-line
growth in the emerging Latin American market.
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 to overcome restrictions imposed by the Health Care Reform
back in the U.S. Over time we expect more deals from the company,
pertaining to its international expansion where it faces less
Factors offsetting the positives include higher operating costs,
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. This will however wipe out the
extra earnings benefit the company had been enjoying so far.
Low interest rates, which will culminate in 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.