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Managed-care stocks lost around half their value in 2008 as investors worried about ever-rising health care costs and a weakening economy. Industry giant UnitedHealth Group (UNH) saw its shares plunge 54% to an October low of $14.51, but there are signs that the company is stabilizing. With a solid balance sheet, healthy cash flow and rising premiums, Barron's sees substantial upside for UnitedHealth in the next year or so.

UnitedHealth has nearly 33 million customers in medical-benefits programs, and leads market share in the small but growing customer base of Medicare and Medicaid patients (an area that could see growth from Obama's stimulus plan). CFO Michael Mikan says the company is adequately pricing inflation into its premiums by "matching our prices to our expected cost trends, and we're staying disciplined in that regard." The company expanded aggressively in the 1990s and now has plenty of room to scale; at the end of last year, its network of health-care suppliers included 4,900 hospitals and 585,000 doctors. Though most of UnitedHealth's 2008 revenue came from health-benefits, the company has also been building a fast-growing health-services division.

The company posted profits of $6.35B in 2008 (or $2.95/share) on revenue of $81.2B, generating $4.8B in operating cash flow. 2009 earnings guidance is for $2.90-$3.15/share. Shares trade for 9.6 times consensus 2009 estimates of $3.01/share. An earnings rebound could send shares as high as the low-50s.

Note: The company recently reached two settlements, totalling $400M, relating to a database of out-of-network medical charges that allegedly set prices too low.

  • John Rex, of JPMorgan, notes that UnitedHealth "has now put up two consecutive [quarterly] reports that show much-improved quality, after a long drought that persisted for much of 2007 and the first half of 2008."
  • Joshua Raskin, of Barclays Capital, upgraded UnitedHealth to Positive from Neutral, with a price target of $35.

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  • UnitedHealth: Q4 EPS of $0.78 in-line. Revenue of $20.45B (+9.4%) vs. $20.35B. (PR)
  • In July, UnitedHealth agreed to a $925.5M settlement of a lawsuit alleging improper backdating of stock options.
  • UnitedHealth is testing the "medical home" model of health care, a new model many experts say holds promise but is still unproven.
Source: UnitedHealth Is Looking Healthy - Barron's