Why United Health Is Ripe to Make More Acquisitions

The company's free cash flow outlook indicates that it could buy more meaningful assets.

JACOB SONENSHINE DEC 4, 2019 3:16 PM EST

United Healthcare's recent Investor Day left analysts largely more positive on the stock than they were before that event. 

And one analyst flags as distinctly possible a particular prospect: United Health could make more acquisitions, even shortly after its successful --so far -- purchase of Optum. 

At the managed-care giant's Investor Day, the New York company said it's forecasting 2020 adjusted earnings per share of between $16.25 and $16.55, with the midpoint of $16.40 missing analysts estimates of $16.46 by 3%. Nonetheless, at least six analysts raised their price targets on the stock.

UNH guided for revenue of between $260 billion and $262 billion, better than analysts' expectation of $260.2 billion.

Analysts are also quick to note that UNH usually guides conservatively, as it has beaten EPS expectations for the past eight quarters. 

Adding to the optimism, "With about $17 billion of free cash flow in 2020, the company has ample flexibility to pursue acquisitions," wrote Cantor Fitzgerald analyst Steven Halper in a note. 

Analysts polled by FactSet expect United Health to generate $17.89 billion of free cash flow in 2020, which would be 17% growth year-over-year. 

Halper added, "Over the years, UNH has had a strong strong acquisition and capital redeployment track record. We do not expect 2020 to be any different." 

Baked into the guidance and analyst optimism that UNH can soon accelerate earnings growth is Optum. United bought Optum in 2011 and built the business. Analysts now expect Optum to account for half of United's earnings in 2020, as the services unit is expected to serve as the primary growth driver for the parent. 

The key synergy is that Optum not only provides additional revenue streams, but it gathers customer data, which enhances the legacy insurance business.

Broadly speaking, the combo can help move United's annual earnings growth back toward its long-term goal of 13% to 16%. Management's 2020 guidance implies a 9% growth rate, which does include a 50-cent-per-share negative impact from the return of health insurance fees. 

Zev Fima, research analyst for Jim Cramer's Action Alerts Plus, posits that smaller acquisitions are more likely. 

"Given the company's robust cash flow, we could certainly see some acquisitions in 2020," Fima said. "Chances are those would be more tuck-in type acquisitions rather than anything groundbreaking. But even that can be viewed as an incremental positive as UnitedHealth can bring its massive data hoard to any potential acquisition and, as a result, likely achieve things that those businesses couldn't on their own, simply thanks to United Health's massive scale and reach."

UnitedHealth is a holding in Jim Cramer'sAction Alerts PLUS Charitable Trust Portfolio.

https://www.thestreet.com/investing/united-health-dec-4