UNITEDHEALTH GROUP INC

Transcription

1 HEALTHCARE SERVICES Managed Care Market Overweight UNITEDHEALTH GROUP INC (UNH $ Outperform) Expect Strong Q2 + Focus on Early 2018 Commentary Look for solid results when UNH reports next Tuesday 7/18 We expect strong business momentum across both UHC and Optum will continue with likely upside to our $2.35 EPS est. for Q2 (consensus $2.38). Given expectations are already here look for focus to shift ahead including any early read on While UNH is unlikely to give details this far ahead, we would note that our 2018 est. is on the low-end of consensus views (Wolfe $10.58 vs. consensus $10.79). This is important as we note our 2018 growth est. of ~8% assumes a strong core growth rate of 13% partially offset by our est. of ~$0.45 of headwinds resulting from the 2017 HIF suspension plus 1x tax benefits (more below) in 2017 which we are unsure are fully reflected in consensus (consensus core growth would be 15% if included) given both our top-line and share-count assumptions are ~ in-line (page 2). We expect these headwinds to get vetted on the call as well as any potential offsets including the balance sheet (UNH will end 2017 back at their 40% LT debt to cap target leaving optionality here), SG&A leverage and other areas of potential margin improvement (Medicaid/Optum). Overall we continue to view the stock as a core holding given best in class insurance assets, Optum growth and strong business momentum HIF Suspension + 1x Tax Benefits Create Non-Core Headwind for 2018 Back at UNH s November Investor Day, mgmt sized the 2017 y/y eps tailwind from the HIF moratorium at $0.25 (Exhibit 2) driven largely by timing of mid-year commercial renewals (we estimate $0.18 commercial / $0.07 Med Adv). Given the industry-wide HIF step up for 2018 is about 30% coupled with UNH s increase in market share, we expect the headwind here could approach $0.35. For now, UNH hasn t said anything on HIF other than noting that 2018 headwind would be larger than the $0.25 tailwind for On the tax rate side, UNH outlined a $0.25 benefit from lower taxes on the Q1 call (32.5% for the full year, revised from 34.25%), split evenly between non-recurring and sustainable benefits (such as SCAI s lower tax rate, ~$0.06). The non-recurring benefit of $0.12 comes in large part from the change in deductibility for stock option exercises, where the % move in the stock + above average option exercises drove an unsustainable benefit this year. As a result, we estimate the resumption of the HIF coupled with the 1x 2017 tax benefits could create a ~$0.45 EPS headwind for Trading and Fundamental Data Target Price YE 17 $194 Prior Target Price NA Current Price $ % Upside to Target 3% 52-Week Range $132-$189 Market Cap. (M) $181,381 Shares Out. (M) Avg. Daily Vol. (000) 2,841 Total Debt to Total Cap 41% Short-Interest Ratio 3.4 % of Float 1.1% Dividend Yield 1.4% Price Performance YTD LTM UNH 17% 33% Managed Care 15% 9% S&P 500 8% 16% $191 $171 $151 $131 Source: FactSet/Wolfe Research Justin Lake, CFA (646) jlake@wolferesearch.com Stephen Baxter, CFA (646) sbaxter@wolferesearch.com DO NOT FORWARD DO NOT DISTRIBUTE DOCUMENT CAN ONLY BE PRINTED TWICE This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications, Important Disclosures and Other Disclosures. WolfeResearch.com Page 1 of 6

2 Potential Q2 Upside on Risk Adjustment On 6/30, CMS released Risk Adjustment data for the 2016 plan year. While UNH does not disclose its 3R accruals and has not commented on the directional position it expected to be in for risk adjustment, we note that data shows UNH to be in a $484M ($304M Individual / $180M Small Group) receivable position for risk adjustment, up $556M from the $72M payable position for 2015 potentially indicating favorability vs. accruals. Individual risk adjustment of $304M represents ~8% of est Individual premiums while 2015 individual risk adjustment of $72M payable was ~2% of est. Individual premiums. Look for more color here on the Q2 call. Dividend increase increases cash returns to shareholders by ~$350M for 2017 Earlier this quarter, UNH announced a dividend increase of $0.12 to $0.75 quarterly or $3.00 annually, increasing the current yield to 1.6%, with total payout in the $3B range annually. Exhibit 1: Wolfe Research Revenue Estimates vs Consensus $ in M 1Q17A 2Q17E 3Q17E 4Q17E FY2017E 1Q18E 2Q18E 3Q18E 4Q18E FY2018E WR Revenue $48,723 $50,805 $50,101 $51,094 $200,724 $54,051 $55,338 $54,574 $55,650 $219,613 Consensus Revenue $48,723 $50,026 $50,239 $51,445 $200,437 $52,898 $53,822 $54,013 $54,841 $217,338 Variance 0.0% 1.6% (0.3%) (0.7%) 0.1% 2.2% 2.8% 1.0% 1.5% 1.0% Exhibit 2: 2017 Tailwind from HIF Moratorium Source: UNH November 2016 Investor Day Presentation WolfeResearch.com Page 2 of 6

3 Exhibit 3: Management Commentary on 2017 Tax Benefit Overall, we now expect 2017 revenues of approximately $200 billion, and adjusted net earnings per share to be in a range from $9.65 to $9.85 per share. This is an increase of $0.30 per share from the midpoint of our outlook in January, partly from an improved tax rate in the area of 32.5% for the full year. The tax rate improvement is driven by a number of factors, about half of which are more discrete in nature, such as share-based compensation and half which we would expect to be more sustainable into the future. - David Wichmann, President UHG, 1Q17 Earnings Call 2017 and 2018 Product Mix and Earnings Bridges Exhibit 4: Product Mix Tables Product Mix Members Revenue NOPAT Margin EPS EPS % Members Revenue NOPAT Margin EPS EPS % Commercial Risk 8,070 $43,503 $1, % $ % 7,909 $45,800 $1, % $ % Commercial ASO 22,108 $7,891 $ % $ % 19,650 $7,918 $ % $ % Individual ACA 173 $1,044 ($30) (2.89%) ($0.03) (0.3%) 190 $1,264 ($20) (1.60%) ($0.02) (0.2%) Commercial Other (ITN'L) 4,178 $7,290 $ % $ % 4,261 $7,755 $ % $ % Total Commercial 34,528 $59,728 $2, % $ % 32,010 $62,736 $2, % $ % Medicare Advantage 4,429 $44,086 $1, % $ % 4,805 $49,445 $1, % $ % Medicare Supp/Part D 13,509 $22,125 $ % $ % 14,094 $24,284 $ % $ % Medicaid 6,479 $37,404 $ % $ % 6,965 $42,219 $1, % $ % Total Government 24,417 $103,614 $2, % $ % 25,864 $115,948 $2, % $ % OptumHealth $20,422 $1, % $ % $23,470 $1, % $ % OptumInsight $8,132 $1, % $ % $9,149 $1, % $ % OptumRx $63,422 $1, % $ % $67,545 $2, % $ % Eliminations (Excl. Interest Exp) ($55,112) NA NA NA NA ($59,811) NA NA NA NA Interest Inc., Expense, and Other $516 $ % $ % $576 $ % $ % Total Other $37,381 $4, % $ % $40,929 $4, % $ % Total $200,724 $9, % $ % $219,613 $10, % $ % WolfeResearch.com Page 3 of 6

4 Exhibit 5: Earnings Bridge $11.00 $10.00 $9.00 $8.00 $8.05 $0.14 $0.18 $0.07 $0.39 $0.11 $0.37 $0.44 $0.16 $0.14 $9.78 $9.80 $7.00 $6.00 $ A EPS Com Risk HIF (Com Only) Com ASO Exchanges Medicaid Med Adv Optum Other Share Dilution 2017E EPS Consensus 2017E EPS Exhibit 6: Earnings Bridge $11.50 $10.50 $9.78 $0.13 $0.02 $0.15 $0.24 $0.46 $0.33 $0.13 $0.19 $0.07 $10.58 $10.79 $9.50 $8.50 $7.50 $6.50 $ E EPS Com Risk Com ASO Medicaid Med Adv Optum HIF Resumption Tax Rate Other Share Repo 2018E EPS Consensus 2018E EPS WolfeResearch.com Page 4 of 6

5 DISCLOSURE SECTION Analyst Certification: The analyst of Wolfe Research, LLC primarily responsible for this research report whose name appears first on the front page of this research report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the research analysts personal views about the subject securities or issuers and (ii) no part of the research analysts compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this report. Important Disclosures: Price Chart with Ratings and Target Price History Note: OP = Outperform; PP = Peer Perform; UP = Underperform Wolfe Research, LLC Fundamental Valuation Methodology: Company: Fundamental Valuation Methodology: UNH Relative PE to S&P 500 on NTM earnings basis Wolfe Research, LLC Fundamental Recommendation, Rating and Target Price Risks: Company: Risks That May Impede Achievement of the Recommendation, Rating or Target Price: UNH The primary earnings risk for MCOs is that cost trend will increase more than priced for. Utilization data points in Q1 raised some concern, but our checks indicate there hasn t been an inflection point. Other industry risks include political / regulatory uncertainty heading into and post 2016 elections. For UNH specifically the key risks include growth at Optum falling short of expectations, pressure on Medicare Advantage reimbursement or changes to risk adjustment, the potential for further pressure on Commercial Risk enrollment and Medicaid rate pressure. Wolfe Research, LLC Research Disclosures: Company: Research Disclosures: UNH None Other Disclosures: Wolfe Research, LLC Fundamental Stock Ratings Key: Outperform (OP): Peer Perform (PP): Underperform (UP): The security is projected to outperform analyst's industry coverage universe over the next 12 months. The security is projected to perform approximately in line with analyst's industry coverage universe over the next 12 months. The security is projected to underperform analyst's industry coverage universe over the next 12 months. Wolfe Research, LLC uses a relative rating system using terms such as Outperform, Peer Perform and Underperform (see definitions above). Please carefully read the definitions of all ratings used in Wolfe Research, LLC research. In addition, since Wolfe Research, LLC WolfeResearch.com Page 5 of 6

6 research contains more complete information concerning the analyst s views, please carefully read Wolfe Research, LLC research in its entirety and not infer the contents from the ratings alone. In all cases, ratings (or research) should not be used or relied upon as investment advice and any investment decisions should be based upon individual circumstances and other considerations. Wolfe Research, LLC Sector Weighting System: Market Overweight (MO): Market Weight (MW): Market Underweight (MU): Expect the industry to outperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months. Expect the industry to perform approximately in line with the primary market index for the region (S&P 500 in the U.S.) over the next 12 months. Expect the industry to underperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months. Wolfe Research, LLC Distribution of Fundamental Stock Ratings (As of March 31, 2017): Outperform: 42% 1% Investment Banking Clients Peer Perform: 46% 1% Investment Banking Clients Underperform: 12% 0% Investment Banking Clients Wolfe Research, LLC does not assign ratings of Buy, Hold or Sell to the stocks it covers. Outperform, Peer Perform and Underperform are not the respective equivalents of Buy, Hold and Sell but represent relative weightings as defined above. To satisfy regulatory requirements, Outperform has been designated to correspond with Buy, Peer Perform has been designated to correspond with Hold and Underperform has been designated to correspond with Sell. Wolfe Research Securities and Wolfe Research, LLC have adopted the use of Wolfe Research as brand names. Wolfe Research Securities, a member of FINRA ( is the broker-dealer affiliate of Wolfe Research, LLC and is responsible for the contents of this material. Any analysts publishing these reports are dually employed by Wolfe Research, LLC and Wolfe Research Securities. The content of this report is to be used solely for informational purposes and should not be regarded as an offer, or a solicitation of an offer, to buy or sell a security, financial instrument or service discussed herein. Opinions in this communication constitute the current judgment of the author as of the date and time of this report and are subject to change without notice. Information herein is believed to be reliable but Wolfe Research and its affiliates, including but not limited to Wolfe Research Securities, makes no representation that it is complete or accurate. The information provided in this communication is not designed to replace a recipient's own decision-making processes for assessing a proposed transaction or investment involving a financial instrument discussed herein. Recipients are encouraged to seek financial advice from their financial advisor regarding the appropriateness of investing in a security or financial instrument referred to in this report and should understand that statements regarding the future performance of the financial instruments or the securities referenced herein may not be realized. Past performance is not indicative of future results. This report is not intended for distribution to, or use by, any person or entity in any location where such distribution or use would be contrary to applicable law, or which would subject Wolfe Research, LLC or any affiliate to any registration requirement within such location. For additional important disclosures, please see The views expressed in Wolfe Research, LLC research reports with regards to sectors and/or specific companies may from time to time be inconsistent with the views implied by inclusion of those sectors and companies in other Wolfe Research, LLC analysts research reports and modeling screens. Wolfe Research communicates with clients across a variety of mediums of the clients choosing including s, voice blasts and electronic publication to our proprietary website. Copyright Wolfe Research, LLC All rights reserved. All material presented in this document, unless specifically indicated otherwise, is under copyright to Wolfe Research, LLC. None of the material, nor its content, nor any copy of it, may be altered in any way, or transmitted to or distributed to any other party, without the prior express written permission of Wolfe Research, LLC. This report is limited for the sole use of clients of Wolfe Research. Authorized users have received an encryption decoder which legislates and monitors the access to Wolfe Research, LLC content. Any distribution of the content produced by Wolfe Research, LLC will violate the understanding of the terms of our relationship. WolfeResearch.com Page 6 of 6