Analysis: UNH

On Tuesday morning, UnitedHealth Group (UNH) reported a top and bottom line beat with its fourth quarter 2018 result. Revenues of $58.4 billion (up 12% year over year) topped the consensus of $57.99 billion, and adjusted earnings per share of $3.28 (up 27% year over year) exceeded the consensus of $3.21.

"The 300,000 dedicated women and men of UnitedHealth Group are positively impacting society by restlessly pursuing a mission to help people live healthier lives and to improve health system performance. Their efforts led to accelerating growth across our enterprise in 2018 and created strong momentum for 2019," said David S. Wichmann, CEO of UnitedHealth Group.

For 2018, UnitedHealth's consolidated medical care ratio (often referred to as MLR) declined 50 basis points year over year to 81.6%, which was just in line with expectations. For the fourth quarter, the consolidated MLR was 82.2%, representing a slight degree of underperformance compared to expectations and this is why the stock exhibited weakness at the market open. In the fourth quarter, management noted how the medical care ration in some traditional Medicaid programs are "still-elevated but moderating". Further, management added that medical cost trends "remained well-managed," and included $280 million in favorable reserve development. It appears that the MLR looks contained to Medicaid issues. For 2019, management expects the medical care ratio to be 82.5%, plus or minus 50 basis points.

From a cash flow standpoint, the company ended the 2018 year generating $15.7 billion in cash flows from operations (below consensus of $16 billion but above guidance of $15.5 billion), a result that is an increase of 16% year over year and was an impressive 1.3x net earnings.

UnitedHealth Group also has a monster buyback program in place, and management repurchased roughly 3.3 million shares in the quarter, making the total for the year at 19 million shares for $4.5 billion.


At UnitedHealthcare, revenues of $46.2 billion (consensus $45.95 billion) were up 11% year over year. Operating margin came in at 3.9%, representing a 30-basis point decline year over year, was similar to the third quarter result.

In the quarter, UnitedHealthcare Employer & Individual revenue increased by about 4.5% year over year to $13.905 billion. Services to people in commercial group risk-based offerings increased for the fourth consecutive year. Of the 75,000-person year over year increase in risk-based products, 45,000 were in the fourth quarter.

In the quarter, UnitedHealthcare Medicare & Retirement revenue was $18.9 billion, up 15.3% year over year. At year end, the business grew to service 9.5 million people with medical benefit products, representing an increase of 615,000 year over year.

In the quarter, UnitedHealthcare Community & State revenues grew 10.2% year over year to $10.955 billion. For the full year, 255,000 fewer people were served due to factors that include the addition of new carriers to existing programs, a reduction in enrollment from state efforts to manage eligibility status, and the divestiture of a New Mexico plan.

In the quarter, UnitedHealthcare Global revenue increased roughly 26% year over year to $2.4 billion due to business expansion. Margins also improved for the full year.


Optum once again delivered very strong results and full year sales surpassed the $100 billion milestone for the first time. We expect this business to build off its 2018 momentum which featured a 12% or more increase in earnings from operation across all segments. Revenues of $27.56 billion (consensus $26.4 billion) increased about 13% year over year for an acceleration from the third quarter's 11% growth rate. Furthermore, the operating margin expanded 70 basis points year over year to 9.8%

In the quarter, OptumHeath revenue increased 17% year over year to $6.4 billion. At year end 2018, OptumHealth served approximately 93 million people, an increase of nearly 6% or 5 million more people during the year.

In the quarter, OptumInsight revenue increased 11.2% year over year to $2.5 billion. The contract backlog ended the year at $17 billion, up nearly 13.3% from a year ago.

In the quarter, OptumRX revenue increased 12% year over year to $19.0 billion. Over the full year, this segment fulfilled 1.34 billion adjusted scripts, an increase of 3.5% over the prior year.

Looking ahead, management backed its 2019 outlook, which is earnings per share in the range of $13.70 to $14.00, adjusted earnings per share in the range of $14.40 to $14.70 (consensus $14.62), and cash flows from operations in the range of $17.3 to $17.8 billion (consensus $17.711 billion). No change should have been expected here because this guidance was initially provided at the end of November 2018, and we are too early into 2019 for a change. That being said, CFO John Rex suggested on the call that he expects the company to have a "modestly stronger" first quarter than the current consensus estimate suggests.

Overall, this quarter wasn't as strong as the company's third quarter result, however, it was a very solid result given the fact that much good news (mainly from the November 2018 Investor Day) had already been priced into the stock. Of note, we are encouraged with both the reiteration of the average long-term growth rate target of 13% to 16% and management's commitment to cost management. Furthermore, we believe UnitedHealth Group represents a terrific option to those investors in search of a high-quality stock whose business model has shown a degree of resilience to the various exogenous factors that have affected this market.

But don't take it from us. CEO David Wichmann discussed this concept on the conference call when he said, "Whether it's an economic expansion or recession or whether there's a liberal conservative administration, UnitedHealthcare positioning tends to be unique and very well regarded. We managed a portfolio of diverse health care businesses and they serve large and diverse end markets, and we tend to grow regardless of economic cycle or administration."

Later Wichmann added, "This is a very scaled and proven model that has a deep management team and with strong continuity. It's marginally 95% domestic. So we really don't have tariff, Brexit or other global concerns, and it has a long runway for growth."

We reiterate our ONE rating.