Following its 1Q15 earnings release, UnitedHealth Group’s (UNH) share price and Wall Street PE (price-to-earnings ratio) estimates saw gains over past quarters.
Following the announcement of its 1Q15 results, the company’s share price rose by 3.6%, and its forward PE estimate increased by 2.7%. Following the company’s 4Q14 earnings announcement on January 21, 2015, its PE multiple increased by 6.4%, up from 15.5x to 16.5x.
These increases reflect positive investor sentiment about UnitedHealth Group’s strong revenue and net income growth, as well as its cost-efficient management.
Health insurance companies (XLV) such as Cigna (CI), Humana (HUM), and Aetna (AET) mainly return value to shareholders through dividends and share buyback programs. But UnitedHealth Group’s approach to creating shareholder value is more focused on investment and M&A (mergers and acquisitions) opportunities.
On March 30, 2015, the company announced the acquisition of Catamaran, a PBM (pharmacy benefit management) company, for a consideration of $12.8 billion. This acquisition will be financed with existing cash and additional debt. The deal may further restrict the company’s ability to return value to its shareholders. Increasing debt may also reduce future net earnings and could affect the company’s valuation.
Changing business mix
The Catamaran acquisition is expected to dramatically change UnitedHealth Group’s business mix beyond 2016. UnitedHealth Group’s pharmacy revenues are expected to rise by about $20 billion annually. This exposes the company to PBM-related risks such as specialty drug price increases and possible regulatory changes involved with giving fiduciary responsibility to the PBMs. Increasing debt from the Catamaran acquisition and rising business risks could also impact the company’s forward valuations.