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Can UnitedHealth (UNH) Maintain Its Bull Run in 2017?

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Leading medical health maintenance organization UnitedHealth Group Inc.UNH has been able to draw investor attention through its stellar earnings performances, irrespective of the hiccups.

In 2016, the company's shares gained 36.04% outshining the return of 21.02% logged by the Zacks categorized Medical Health Maintenance Organization industry. It also managed to steer past industry players like Aetna Inc. AET , Humana Inc. HUM , Anthem Inc. ANTM that saw gains of 14.7%, 14.3% and 3.1%, respectively, during the same timeframe.

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Can UnitedHealth Maintain the Momentum?

After the strong performance in 2016, the company looks well positioned for growth in 2017 by virtue of its diversified business in the health insurance space, exit from Exchanges for 2017 and high-growth Optum business. These also protect the company from the effect of changes that would be bought by the "repeal and replace" of the HealthCare Reform by President-elect Donald Trump.

UnitedHealth's impressive results and strong guidance for 2017 point to growth this year. Improving commercial pricing, MA enrollment, Medicaid contract wins, stable medical costs and continued growth at Optum are likely to drive revenues. For 2017 the company projects revenues in the range of $197 billion to $199 billion, net earnings in the band of $8.75 to $9.05 per share and adjusted net earnings at around $9.30 to $9.60 per share. Cash flows from operations are expected within $11.5 billion and $12 billion.

Let's take a look at the factors that are likely to propel earnings this year.

Public Exchange Exit : Since the beginning, the company had a conservative approach toward public exchanges, which was formed to provide subsidized coverage. As UnitedHealth has been incurring losses in the business, the company made an exit from all but three exchanges last year. Though this exit will result in significant membership attrition, the decision will counter losses and improve its financial position.

Medicare Advantage (MA) Prospects Bright : The company's MA plans have been driving growth on superior quality and service. For 2017, more than 80% of UnitedHealthcare's MA membership will be in plans rated four stars or higher by CMS. We expect 2017 to be another year of strong growth, both for the company's individual and group MA. The company is expected to grow the MA Part D business in 2017, banking on the introduction of a nationwide product set for a broader senior demographic.

Optum Trending Strongly : UnitedHealth has been heavily investing in Optum, which has been a unique asset for the company. The segment seems attractive because of its immunity to regulations, which makes UnitedHealth a worthy investment in a heavily-regulated industry. The segment was formed after the passing of the HeathCare reform act and primarily focuses on diversifying the company's earnings from sources which are outside the purview of stringent regulations.

Since 2011, Optum has compounded revenues at 23% and operating earnings at 34% per year. In 2015, Optum grew its revenues by 42% (including the acquisition of Catamaran in July) and contract backlog by more than 20%. The growth trend continued in the first nine months of 2016 and we expect the segment to continue garnering strong, sustainable growth across the board in 2017.

Growing Membership: The company is steadily growing its customer base across both the segments - UnitedHealth Care and Optum. Membership growth at Optum is expected to come from three large PMB wins (General Electric, CALPERS and TX), new Quest Diagnostics and Dept. of VA contracts and OptumCare expansion. Membership growth at the UnitedHealth care segment is expected to be driven by VA MLTSS and MO TANF - recent RFP contracts.

Balance Sheet Strength : The company's efforts to reduce debt, continue with share buyback and plans to raise dividends make the stock an impressive investment for 2017.

Other positives includes its growing Accountable Care Organizations, international business, stable medical cost trends. Buoyed by these tailwinds, we believe the company will continue posting positive earnings surprise in 2017.

UnitedHealth carries a Zacks Rank # 2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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