You can rarely go wrong by investing in insurance.
UnitedHealth Group (UNH) reported third-quarter results Tuesday morning and I like what I see. With revenues and earnings that whipped estimates, the company has continued a trend of upward momentum that I believe higher rates will actually help.
Healthcare giants such as UnitedHealth use their capital to invest in bonds to produce income. As rates increase, those underlying investments should begin to yield better results. Moreover, Action Alerts PLUS holding UnitedHealth is successfully increasing its membership base. In a market where investors are going to start getting more and more careful about what they own, UnitedHealth looks good.
Steady as She Goes
The company is very consistent in terms of quarterly results. The third quarter was no different.
Revenues of $56.56 billion represent a 12.4% increase year to year, and beat out many estimates looking for $56.34 billion. Operating income rose 12.3% to $4.59 billion. Thanks primarily to lower overall tax provisions, net income was up 28% to $3.28 billion. On an adjusted basis, earnings increased 28% to $3.41 per share. Like I said, you'll rarely go broke by investing in insurance.
Thanks to the earnings beat, UnitedHealth has raised its forecast for the year. Guidance suggests full-year adjusted EPS of $12.80. On a GAAP basis, it expects earnings of $12.10 per share. Either way, if UNH hits those figures, it would give the company substantial EPS growth over full-year 2017 results. That would give the stock a forward P/E multiple of around 22x at current levels.
The strength of the business here is highly encouraging. With 2.8 million new customers (year over year) in the quarter, it's clear that there is still room to grow for this juggernaut.
When looking at UNH stock, you're looking at reliability. Revenues increase year after year, and with the exception of a slight hiccup in 2014, the company almost always derive higher net income from it.
Just Me Being Picky
If I had to be critical of one area, I do not like the declining cash position and increasing long-term debt. However, that's rather picky on my part. UNH has nearly $14 billion in cash on hand, and almost $11 billion in receivables as of Sept. 30. Despite the rising long-term debt of $32 billion, the company's equity is increasing.
The balance sheet changes definitely have a little to do with the company's ongoing share buybacks. While I don't like the spending, the decreased share count most certainly helps earnings per share. The insurer has spent more than $3.6 billion on share repurchases in the first nine months of the year, with buybacks of 1.9 million shares in the third quarter alone.
Unscathed by Correction
I think UNH can hit $300 over the next year. That roughly 10% gain reflects my expectation that earnings can continue to rise. The market's recent correction left the stock relatively unscathed, demonstrating a shifting investor preference for steadier equities. UNH is one of them.
UNH continues to expand into new areas, and has a rising consumer base. It purchased Genoa, a pharmacy chain that operates within mental health facilities, for a reported $2.5 billion. If the company's track record says anything, it means the acquisition will likely pay off.
The 1.38% dividend yield may be unexciting, but it does offer some income. Overall, I'm more interested in the potential of the share-price gains.
In my view, we will see a continued shift from overpriced tech, and UNH seems primed to be the recipient of new money.