UnitedHealth Group (NYSE:UNH) is likely to benefit from a product that will always be a necessity – managed healthcare. The company continues to work diligently to improve its offerings through better health outcomes/consumer experiences at lower costs. UnitedHealth has a strong track record of exceeding earnings expectations. Double-digit earnings growth and the continual exceeding of expectations are likely to drive the stock to outperform over multiple years.
Strong Organic Growth
UnitedHealth is experiencing strong organic growth primarily from the OptumCare business which achieved a 40% revenue increase in Q2 2017 while the overall revenue from the Optum segment increased 10%. Some of that revenue increase came from strategic business expansion.
The company’s goal with OptumCare is to create the leading ambulatory care system in the United States. UnitedHealth plans on achieving this by providing patients with high-quality, cost-effective care. The key to achieving this is through the use of OptumCare analytics which provides clinicians with data that can be used to improve patients’ lives.
The company is still in the early stages of developing the OptumCare business. UnitedHealth sees OptumCare as having at least 10 years of significant growth remaining. So, Optum is likely to be a strong driver of growth for the company going forward.
The OptumRx business provided the company with revenue growth of 5% for Q2. This business is experiencing strong customer retention with renewal rates in the high 90s percentage range. UnitedHealth expects to grow script volume above the industry growth rate in 2018.
The OptumInsight business also looks strong as revenue backlog increased 18.6% to $2.1 billion over the past year. Strength for OptumInsight came from the payer and care provider markets. Overall, the Optum businesses are strong and likely to remain strong and drive growth for UnitedHealth for the foreseeable future.
Consistently Exceeds Revenue/Earnings Expectations
UnitedHealth exceeded earnings expectations for 15 consecutive quarters. That is quite a track record. There is no guarantee that it will continue. However, the fact that analysts’ estimates have been increased for 2017 and 2018 over the past few months demonstrates that there is plenty of confidence in the company’s ability to increase profits and achieve strong results. Given the increased estimates and strong track record of exceeding earnings expectations, I feel confident that UnitedHealth will continue to beat earnings expectations for most quarters this year and in 2018.
Analysts’ consensus earnings per share expectations increased from $9.79 about three months ago to the revised $9.87. EPS expectations were also increased for 2018 from $10.75 to $10.86 over the past three months. The increased estimates are likely to provide the stock with some positive momentum.
Valuation Looks Reasonable
UnitedHealth is trading at 17.8X expected earnings for 2018. This is about 5% below the S&P 500’s (NYSEARCA:SPY) forward PE of 18.7. Here’s how the company compares to its industry peers:
UnitedHealth is trading slightly above the average of its peers. I see the valuation as fairly valued at this level. Out of these five companies, UnitedHealth is the only company expected to grow earnings at a double-digit pace for both 2017 and 2018. It is expected to grow earnings at a strong 20% in 2017 while all others are expected to experience year-over-year EPS declines for 2017.
UnitedHealth’s peers are expected to return to positive earnings growth in 2018. However, UNH’s strong earnings growth momentum for 2017 should give the stock an advantage over its peers heading into 2018.
UnitedHealth demonstrated a strong ability to grow organically. This shows that the company has internal strength and meaningful earnings. The company’s internal strength has it on a consistent track record of exceeding earnings expectations.
I expect this strong performance to continue for most quarters over the next 12 to 18 months. With a reasonable fair valuation, I think the stock can rise about 15% over the next 12 months. This is based on the average of 2017’s expected EPS growth of 20% and 2018’s expected growth of 10%.
That’s what I think. Let me know what you think in the comment section below.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: If you like my analysis, click on FOLLOW at the top of the article near my name. That will allow my articles to display on your homepage as they are published. The article is for informational purposes only (not a solicitation to buy or sell stocks). I am not a registered investment advisor. Investors should do their own research or consult a financial advisor to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate.