(Bloomberg) — In the worst year for U.S. health care shares since the Great Recession, one stock stood out: UnitedHealth Group Inc.
For the U.S.’s biggest health insurer, just about everything is looking up, even as Affordable Care Act is headed down. The stock is up 38 percent this year, neck and neck with Caterpillar Inc. for the top spot on the Dow Jones Industrial Average.
“They’ve done better than anyone in 2016, with upside for 2017,” said Ana Gupte, an analyst at Leerink Partners who rates the shares outperform.
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The rally — and optimism for next year — comes despite huge losses this year on UnitedHealth’s ACA health plans. Investors have been willing to overlook that misstep because the company is exiting most of the ACA public exchanges for 2017. Another plus for the insurer: about 40 percent of earnings now come from its fast-growing Optum units, whose technology and services operations tend to have higher margins than the main health-insurance business.
Minnetonka, Minnesota-based UnitedHealth is the brightest spot in an industry mired in an array of distractions. The insurer’s four biggest rivals have been embroiled in a pair of drawn-out mergers that both face opposition from the U.S. Justice Department.
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Pharmaceutical and biotech firms are under intense scrutiny over rising drug prices, and hospitals stocks have slumped in anticipation of a repeal of Obamacare under President-elect Donald Trump, which could leave more patients without insurance to pay for their care. As a result, the Standard & Poor’s 500 Health Care Index is the worst-performing of the S&P 500’s ten industry groups this year, set to decline for the first time since 2008.
In the health insurance industry, there are benefits to being the biggest, like more negotiating power with doctors and hospitals, and an ability to spread fixed costs over more members. UnitedHealth can also draw on its Optum businesses to help improve the way its insurance unit operates, creating a “feedback loop” between the two businesses, according to Sheryl Skolnick, an analyst at Mizuho.
Optum has three businesses: the pharmacy-benefits manager OptumRx, the OptumHealth care-delivery and wellness unit, and the OptumInsight technology unit. OptumRx has been winning clients since completing its acquisition of rival Catamaran Corp.
UnitedHealth has “been finally getting that extra benefit of all the learnings in Optum,” said Skolnick, who advises buying the shares. “I’m quite excited about what they’ll be able to accomplish next year.”
The one black mark has been Obamacare, where UnitedHealth expects to lose about $850 million this year on health plans sold to individuals. But the Minnetonka, Minnesota-based company is putting those losses behind it by exiting most of the exchanges for next year.
In late November, UnitedHealth predicted an increase of as much as 24 percent in earnings per share, excluding some items, in 2016, and as much as 20 percent in 2017. Analysts, on average, anticipate a gain of 19 percent next year, faster than the 9 percent growth they expect from Aetna Inc. or the 7 percent increase they’re projecting for Indianapolis-based Anthem Inc.
That quick growth, driven in part by Optum, helps explain why UnitedHealth trades at richer multiples of earnings than its rivals, said Gupte, the Leerink Partners analyst.
“They deserve a multiple above the market,” she said.
Optum will continue to drive future growth: The company anticipates that Optum’s operating profit will climb as much as 14 percent to $6.4 billion in 2017, based on the outlook it gave investors on Nov. 29. For its insurance group, UnitedHealth sees a gain of as much as 9 percent to $8.3 billion.
UnitedHealth performed well in a year that is ending with five drugmakers among the S&P 500’s 10 worst stocks. But there’s a lot of uncertainty about Trump’s plan for health care. It could pose a potential stumbling block for UnitedHealth — and other health insurers — going forward.
Risks include potential changes to the private Medicare program for the elderly, as well as to the tax rules for employer-provided health insurance. And while UnitedHealth has limited vulnerability tied to a repeal of the ACA, it could see profits curbed if funding for the Medicaid government insurance program for the poor is cut, according to Skolnick, the Mizuho analyst.
“For United, disruption tends to be an opportunity, unless you’re whacking away at rates,” Skolnick said.
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