By Jospeh Weber
Pouncing on opportunities of all sorts is how $45.4 billion UnitedHealth Group (UNH ) generates earnings gains topping 20% year after year. The profits -- and deals -- just keep coming, making the nation's biggest health-care benefits company, which serves 65 million Americans, a BW50 perennial. The Minnetonka (Minn.) company marked its fifth year on our list by moving up one spot into fourth place.
The health-care titan, which added 10 million customers last year, fuels its growth by providing services as varied as employee health-care insurance benefits, Medicare drug benefits to seniors under the government's Medicare Part D prescription-drug program, and discount health-care cards sold at the likes of Sam's Club (WMT ).
For Dr. William W. McGuire, chief executive since 1991, the key to such gangbuster growth is a diverse portfolio. He's pushed UnitedHealth into ventures such as helping the Food & Drug Administration monitor the safety of drugs. It also teamed up with cardiology groups to study cardiac care with an eye toward putting the word out on best practices, and allied itself with the AARP to manage health-care insurance and pharmacy benefits.
Recently, it linked up with Walgreen's (WAG ) to offer drug benefits to seniors under Medicare's new prescription-drug program. McGuire says this will expand the company's reach so that it provides at least one product to one out of every five Americans over the age of 65.
Certainly, McGuire, who has built UnitedHealth through a string of largely winning, well-integrated acquisitions, hasn't lost his appetite for deals. In December, he gobbled up one of the biggest independent operations, PacifiCare Health Systems, in a $9.2 billion deal. That will add some $500 million in net income this year, and represents some 7 million consumers. McGuire also snapped up John Deere Health Care Inc., a health plan serving four states, and a small south Florida health plan.
Such deals, and internal growth, will likely drive UnitedHealth to more double-digit gains. Even if the company makes no more acquisitions, revenues will probably top $70 billion this year, a 54% gain, after climbing 21% in 2005. Earnings could rise from 2005's $3 billion to $4 billion. Little wonder that its stock rose 41% last year, to about $62, though it has since pulled back to $57.
"They'll continue to make good money," says Standard & Poor's analyst Phillip M. Seligman, who anticipates a rebound in the stock from "a flight to quality" among investors in health care stocks.
McGuire's diversification arises out of necessity. The company's biggest, but least profitable, engine is its health-care services arm. The operation, which provides employer-paid health-care across the country and services to state Medicaid programs and the elderly, accounted for over $39 billion in revenue last year, but sports an operating margin of just 9.5%.
UnitedHealth's smaller units, such as Ingenix Inc., which helps the FDA analyze drug performance data, boast margins topping 20%. Such fast-growing areas account for more than $6 billion in revenues, and some $1.5 billion in pretax earnings. That's why McGuire is eager to expand into lucrative niches like discount health-care cards, which are a way to tap into the uninsured market, while adding services for existing members.
Some analysts fret that revenue gains for employer-based health-care could slow as costs are shifted onto employees. That's partly why UnitedHealth's stock price, about $57, has slipped about 12% from recent highs in a sharper pullback than that of peers. If gains do slow, McGuire may benefit from his push into the new Medicare Part D program, which he says could deliver as many as 6 million new members. That would make UnitedHealth the program's biggest player.
The potential downside to such success? The government could cut benefits. But focusing on the elderly is a good bet. With the AARP as a key partner, aging could prove unusually enjoyable for the 57-year-old McGuire -- at least on the balance sheet.
Weber is BusinessWeek's chief of correspondents