Valuentum Exclusive Analysis for the Discerning Investor

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Image Shown: Shares of UnitedHealth Group Inc, an idea in the Dividend Growth Newsletter portfolio, are trading near their all-time highs as of this writing after the firm reported a stellar second quarter 2021 earnings report. In conjunction with its latest earnings report, UnitedHealth Group once again raised its full-year adjusted EPS guidance for 2021. We continue to be huge fans of the name.

By Callum Turcan

On July 15, UnitedHealth Group Inc (UNH) reported second-quarter 2021 earnings that beat both consensus top- and bottom-line estimates thanks to the enduring strength of its Optum businesses and strong performance at its UnitedHealthcare health insurance businesses.

Its Optum businesses provide an expansive slate of healthcare offerings from ambulatory services to pharmacy and special pharmacy services to administrative services to data driven insights to improve patient outcomes (as we covered in our December 2020 article that can be viewed here). UnitedHealth Group’s health insurance business are also performing quite well even as its customers are now utilizing healthcare services in earnest after delaying those activities in the face of the initial phases of the coronavirus (‘COVID-19’) pandemic.

Furthermore, management raised UnitedHealth Group’s full year guidance (again) in conjunction with the company’s latest earnings report, which we really appreciate. We include UnitedHealth Group as an idea in the Dividend Growth Newsletter portfolio and continue to be huge fans of the name. Shares of UNH yield ~1.4% on a forward-looking basis as of this writing after the firm boosted its payout by 16% in June 2021 (as we covered here).

Guidance Boost

Back in December 2020, UnitedHealth Group provided its initial guidance for 2021 that called for $277-$280 billion in revenue and adjusted EPS of $17.75-$18.25 for the full year. Management reiterated that guidance during the company’s fourth-quarter 2020 earnings call, boosted the firm’s adjusted EPS guidance to $18.10-$18.60 during its first quarter 2021 earnings call, and during UnitedHealth Group’s second-quarter 2021 earnings call on July 15, management again boosted the firm’s full-year guidance.

Now, UnitedHealth Group aims to post $18.30-$18.80 in adjusted EPS in 2021, and we appreciate the steady increases in the firm’s near-term guidance. For reference, UnitedHealth Group posted $16.88 in adjusted EPS in 2020. We believe there is an increased likelihood that the latest guidance is even conservative. 

UnitedHealth Group has been firing on all cylinders of late, keeping in mind that its business faces sizable headwinds from the COVID-19 pandemic which is expected to shave $1.80 off its EPS performance this year (with approximately 70% of that occurring in the second half of this year according to recent management commentary).

However, management reiterated during the firm’s latest earnings call that the company remains confident it can grow its EPS by 13%-16% annually over the long haul. We view UnitedHealth Group’s growth outlook quite favorably, and apparently so does the market at-large considering shares of UNH are trading near their all-time highs as of this writing.

Earnings Update

In the second quarter of 2021, UnitedHealth Group’s GAAP revenues were up 15% year-over-year, though its GAAP operating income fell by 35% year-over-year. Please note that this is primarily due to its healthcare insurance patients resuming elective surgeries and other health services in earnest that were delayed due to the pandemic. Its ‘medical care ratio’ (the percentage of healthcare premiums spent on medical services) rose to 82.8% in the second quarter of 2021 from 70.2% in the second quarter of 2020. Back in the second quarter of 2019, that ratio stood at 83.1%, so this change was not unexpected.

The firm generated $10.4 billion in free cash flow during the first half of 2021 which easily covered $2.5 billion in dividend obligations and $2.9 billion in share repurchases made during this period. UnitedHealth Group’s balance sheet remained pristine at the end of June 2021 as it exited the second quarter with ~$18.4 billion in net cash on hand (inclusive of short-term debt and long-term investments), though it also has significant non-cancellable financial obligations to be aware of here.

Operations Update

During UnitedHealth Group’s latest earnings call, management had this to say about the firm’s Optum businesses (emphasis added):

“Moving to overall business performance, OptumHealth second quarter revenue and earnings increased 46% and 34% respectively year-over-year. Revenue per consumer grew by 43%, reflecting the impact of accountable arrangements and our expanding home and community health platform combined with the growing complexity of the needs we’re serving. Of the 20 million patients we serve through Optum Care, over 2 million are in fully accountable or capitated care arrangements, an increase of 17% from a year ago, and we expect this pacing to accelerate strongly in the years ahead.

OptumInsights revenue grew 12% in the quarter and earnings grew 36% with the revenue backlog increasing by $1.9 billion to $21.3 billion. Key growth drivers were managed services, the continued recovery of care activity to more normal levels, and further implementations of technology-enabled services. In particular, we are seeing strong sales momentum in the services, software and analytics business, which serve care providers.

OptumRx revenue and earnings increased 5% and 19% year-over-year and script growth was 8%, with this comparison impacted by last year’s pandemic-affected care patterns. Our expanding pharmacy care and specialty services continue to grow strongly, now comprising just under half of OptumRx revenues.” --- John Rex, Vice President and CFO of UnitedHealth Group

As it concerns UnitedHealth Group’s health insurance businesses, management noted that its commercial plans have been performing well with 150,000 new members year-to-date. The company’s Medicare Advantage membership had grown by 675,000 members year-to-date and is tracking above the firm’s full-year outlook. Its house call clinician operations, particularly for seniors, were cited as a source of strength.

The firm’s Medicaid plans were also performing well by “deliver[ing] a positive consumer experience and demonstrable cost effectiveness for our state government partners, and we look for this momentum to build heading into next year” according to recent management commentary. We appreciate the widespread strength in UnitedHealth Group’s performance of late, keeping in mind year-over-year comparisons are incredibly noisy due to the COVID-19 pandemic.

As an aside, the firm did not offer up much new information on its pending all-cash ~$12 billion acquisition of Change Healthcare Inc (CHNG) which was first announced back in January 2021. The US Department of Justice (‘DOJ’) is investigating the deal on antitrust grounds. We like the deal, though if it does not go through, we would continue to like UnitedHealth Group given its core performance. Please note any upside the deal may generate, if it does go through as planned, would be entirely incremental to our current fair value estimate and Dividend Cushion ratio.

UnitedHealth Group’s Dividend Cushion ratio sits at a nice 3.4, earning the firm an EXCELLENT Dividend Safety rating. This metric incorporates our expectations the company will aggressively grow its payout going forward as UnitedHealth Group has an EXCELLENT Dividend Growth rating. On a final note, the top end of the company’s fair value estimate range stands at $511 per share, well above where shares are trading as of this writing.

Concluding Thoughts

We are enormous fans of UnitedHealth Group, and the healthcare giant has not disappointed since we added shares of UNH as an idea to the Dividend Growth Newsletter portfolio back on November 27, 2020 (link here). According to data from Yahoo Finance, shares of UNH are up 26% from November 27 to July 15, outperforming the 20% gain seen at the S&P 500 (SPY) during this period before considering dividend considerations (which would not change this picture much).

The company’s balance sheet is pristine, its free cash flow generating abilities are simply stellar, and its growth outlook is incredibly bright. Recent guidance increases highlight management’s confidence that UnitedHealth Group is steadily recovering from the COVID-19 pandemic, keeping in mind that the resumption of elective surgeries and other heath service activities during the second half of this year will create temporary headwinds for UnitedHealth Group. Heading into 2022, UnitedHealth Group sees its various businesses having ample momentum, and the company’s growth outlook over the long haul is incredibly promising.

We like UnitedHealth Group as an idea in the Dividend Growth Newsletter portfolio.

Downloads

UnitedHealth's 16-page Stock Report (pdf) >>

UnitedHealth's Dividend Report (pdf) >>

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Callum Turcan does not own shares in any of the securities mentioned above. Johnson & Johnson (JNJ) and Health Care Select Sector SDPR Fund ETF (XLV) are both included in Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Vertex Pharmaceuticals Inc (VRTX) is included in Valuentum’s simulated Best Ideas Newsletter portfolio. UnitedHealth Group Inc (UNH) is included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Vanguard Consumer Staples ETF (VDC) is included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.