We Believe UnitedHealth Is Entering 2015 Positioned Strongly, Says Wedbush

In a research note released yesterday, Wedbush analyst Sarah James reiterated an Outperform rating on Unitedhealth Group (NYSE: UNH) with a $92 price target, following meetings with United’s senior management team.

James wrote, “We have seen more HQ visits across the industry this August than past years, perhaps to address investor concern over cost trends and sector rotation. We believe Optum analytics and claims clarity is giving investors greater comfort in the reliability of UNH’s cost data, and the business mix is becoming increasingly attractive.” James added, “We feel incrementally more comfortable in commercial cost trends post the meeting with management; no matter which way you slice the data, there was nothing concerning and overall cost trends seem to be towards the low-end of guidance.”

James continued, “We estimate there were $425M-700M in headwinds in 2014 that could come out ($200-300M Sovaldi, $25-75M start up spend for exchanges and duals, $200M Medicare from parity and STARS) implying a base of $5.72. On top of that, we add revenue growth and margin improvement for duals (estimate $75-125M), exchanges, and Optum, enrollment growth and margin improvement for Medicare, and margin improvement in Amil from the strengthened pricing strategy. Going into 2016, we believe there would be the removal of the $200M stars headwind and the final year of the MA move to parity and a better base for pricing exchanges as first year risk adjustment data would be known. With this in mind, we believe the current 2015 consensus of $6.09 and 2016 of $6.86 screen as conservative. Where we could be wrong is on Sovaldi; while below we have it broken out, management believes that costs related to new Hep-C drugs, as well as other specialty pharmaceuticals, will continue to pressure cost trends. We believe United is well positioned to manage these costs through medical management and underwriting.”

 According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Sarah James has a total average return of 15.1% and a 82.4% success rate. James has a 32.1% average return when recommending UNH, and is ranked #675 out of 3266 analysts.

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