Wedbush Securities said UnitedHealth Group Inc. (NYSE: UNH) expects earnings growth in 2012 but flat or declining Commercial and Medicaid earnings; this implies strong Optum and Medicare Advantage growth will drive 2012 earnings growth.

Optum growth is likely to drive 2012. We see potential for upside to current guidance of modest growth off of $4.40 to $4.45 in 2011 from: growth in Optum, continued low utilization and Medicare Advantage enrollment upside, said Sarah James, an analyst at Wedbush Securities.

James could see an announcement of highly anticipated Specialty or HCIT product launches driving the growth as the PBM transition isn't likely to impact earnings until 2013.

Optum's largest product categories include collaborative care solutions ($300 billion market), consumer engagement ($50 billion market), health financial services ($30 billion market), connectivity solutions ($25 billion), hospital solutions ($20 billion), and plan sponsor solutions ($20 billion).

James said moving PBM in-house could add $11 billion to $11.5 billion in revenue and $0.20 to $0.27 in EPS; transition to begin in 2013. The move will add just 3 percent or $330 million in EBIT towards Optum's potential 30 percent to 40 percent EBIT contribution range, implying $1.7 billion in HCIT and Specialty EBIT growth.

United's PBM could be worth $19 billion based on the 20 times EBIT multiple implied in the recent Medco deal, expected to close in the first half of 2012. In her April note, she highlighted United hiring 11 regional sales managers with mandatory commercial PBM experience; commercial PBM was at that point outsourced to Medco.

The announcement to bring the segment in-house four months later came as no surprise, and James believes United's PBM is poised to grow organically, taking share, as it receives as good or better pricing than competitors (Medicare members use 3 to 5 times as many scripts versus commercial members), has a large and experienced sales force in place, and has and an established network of 4,000 employers as well as integrated PBM savings product pitch.

James also believes the disruption caused by the Express Scripts-Medco merger and the Express Scripts-Walgreens lawsuit will create an opportunity for United to capture new business.

James said strong Medicare Advantage enrollment growth opportunity; estimating 13 percent growth (above 10 percent industry) but could see growth as high as 15 percent which could add $0.09 EPS.

She estimates by 2014, the $187 billion and 16 million members Medicare Advantage market could grow by $22 billion, or 1.3 million eligible from aging baby boomers and another $19 billion and 1.6 million members from penetration increases.

Just maintaining share, this could add $4.5 billion in revenue, or $0.10 EPS for UnitedHealth Group by 2014; but if the company continues its annual 60 basis points market share gains, it could be as high as $7.4 billion in revenue or $0.17 EPS.

We believe United is undervalued given its exposure to Medicare, Medicaid and HCIT growth. Our valuation is based on discounted cash flow analyses and peer and historical multiples. Risks to the attainment of our price target include commercial margin compression as well as irrational pricing from non-profit competitors such as Blues plans, said James.

UnitedHealth stock fell 2.72 percent to $43.21 in the pre-market trading on the NYSE.

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