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Introduction

UnitedHealth Group (UNH) could provide investors with a reasonable yet justifiable return despite all the uncertainty surrounding the healthcare reform act. Amidst all this confusion, it is likely that UnitedHealth Group will be able to sustain growth over the longer-term.

Qualitative Analysis

Source: Information pertaining to UNH came from the shareholder annual report, along with YCharts.

In 2012, the UnitedHealth Group was been able to increase its commercial business by 1,055,000 people. The 2012 fiscal year included growth of 1,265,000 people in fee-based offerings. Increases in the medicare division were 245,000 in 2012. Healthcare reform resulted in a spontaneous increase in the number of health insurance purchases. Furthermore, it is likely that healthcare providers and insurers will be able to anticipate consistent revenue growth but may experience declines in profitability in future accounting periods. Healthcare reform will increase the number of health insurance recipients. The downside is that it reduces the profitability of health insurance.


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Profit margins have improved from 3.67% in 2008 to 5% in 2012. Profitability may decline in future periods due to regulations that go into effect between 2013-2014. The basic result of added regulation results in inefficiencies and profit margin erosion. No one can fully predict the actual percentage amount of profit because it will be difficult to determine how management will structure its fees or alter its coverage limitations.

The profitability of the health insurance companies when compared to each other varies by a small degree. UnitedHealth Group currently has a profit margin of 5% and is ranked 2nd in terms of profitability among healthcare companies. The most profitable company is Cigna (CI) at 5.57%, Magellan Health Services (MGLN) follows at 4.71%, Aetna (AET) generates 4.53%, WellPoint (WLP) operates at 4.30%, Humana (HUM) at 3.12%, and Molina Healthcare (MOH) at 0.16%.

The major health insurance companies are able to remain profitable with varying degrees of success after the implementation of healthcare reform. Further regulation will be fully implemented between 2013 and 2014. It is likely that the health insurers will be able to remain profitable and that profit margins should remain highly stable following the full-implementation of reform. I expect the industry to become homogenized in terms of profits, and that profit maximization practices will be standardized industry-wide. This will result in an even more narrow range of profitability, but on the bright side, the health insurers have been able to generate additional revenues due to the legal requirement for every citizen in the United States to have health insurance.


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The cash flow from operations has continued to improve. The underlying factors for growth include regulation (legal requirement for insurance), retirement of baby-boomers (contribution to Medicare division), general population growth. I anticipate the cash flow from the core business to continue to improve as the underlying economics will support further growth.

I remain fairly optimistic on UnitedHealth Group due to the limited negative consequences of healthcare reform.

Technical Analysis

UnitedHealth Group has been able to break above the symmetrical triangle formation and is likely to sustain this rally due to the improving fundamentals of the stock.


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Source: Chart from freestockcharts.com

The stock is trading above the 20-, 50-, and 200- Day Moving Averages. The stock has broken the upper trend line of the symmetrical triangle. The stock will appreciate over the long-term, the up-trend is sustainable.

Notable support is at $51.20, $53.50, and $59.30 per share. Notable resistance is $64.40, $76.00, and $85.00 per share.

Street Assessment

Analysts on a consensus basis have reasonable expectations for the company going forward.

Growth Est

UNH

Industry

Sector

S&P 500

Current Qtr.

-13.00%

46.80%

N/A

10.50%

Next Qtr.

2.40%

73.20%

N/A

16.20%

This Year

4.40%

29.00%

6.60%

8.20%

Next Year

8.30%

11.30%

14.90%

12.90%

Past 5 Years (per annum)

14.30%

N/A

N/A

N/A

Next 5 Years (per annum)

10.94%

14.43%

13.87%

8.91%

Price/Earnings (avg. for comparison categories)

10.28

9.94

12.45

18.52

PEG Ratio (avg. for comparison categories)

0.94

1.05

-2.63

1.83

Source: Table and data from Yahoo Finance

Analysts have reasonable expectations as analysts on a consensus basis have a 5-year average growth rate forecast of 10.94% (based on the above table). This growth rate is below the industry average for next 5-years (14.43%).

Earnings History

12-Mar

12-Jun

12-Sep

12-Dec

EPS Est

1.17

1.19

1.35

1.2

EPS Actual

1.31

1.27

1.5

1.2

Difference

0.14

0.08

0.15

0

Surprise %

12.00%

6.70%

11.10%

0.00%

Source: Table and data from Yahoo Finance

The average surprise percentage is 7.45% above analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

P/E Multiple

2003

$ 1.55

17.89

2004

$ 1.93

21.75

2005

$ 2.44

24.30

2006

$ 3.09

16.66

2007

$ 3.55

15.66

2008

$ 2.45

10.38

2009

$ 3.27

8.92

2010

$ 4.14

8.45

2011

$ 4.81

10.34

2012

$ 5.38

10.04

Source: Data from YCharts

The EPS figure shows that throughout the 2003 to 2007 period, the company was able to grow earnings. Throughout 2008-2009, earnings declined. Following the great recession, the company was able to grow earnings per share to a new all-time high.


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Source: Data from YCharts

By observing the chart, we can conclude that the business is somewhat cyclical and is affected by macroeconomics. Therefore, one of the largest risk factors to UNH is the slowing of gross domestic product growth. So as long as the global economy continues to grow, the company will generate reasonable returns over a 5-year time span based on the forecast below.


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By 2018, I anticipate the company to generate $10.48 in earnings per share. This is because of revenue growth, favorable economics, cost-cutting, and share buy-backs.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5-years.


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Below is a price chart incorporating the past 10 years and the next 6 years detailing 16 years in pricing based on my forecast and price history on December 31st of each year.


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Source: Data from YCharts and price history is from Yahoo Finance.

Investment Strategy

UNH currently trades at $61.67. I have a price forecast of $75.94 for December 31st 2013. The stock is currently trading below valuation, and should be bought at pull backs as a part of a longer-term accumulation strategy.

Short Term

Over the next twelve to twenty-four months, the stock is likely to appreciate from $61.67 to $75.94 per share. This implies 23.14% upside from current levels. The technical analysis indicates a long-term up-trend. While the previously mentioned price forecast using fundamental analysis further supports the assessment.

Investors should buy UNH at $61.67 and sell at $75.94 in order to pocket short-term gains of 23.14% between 2013 and 2014.

Long Term

The company is an exceptional investment for the long-term. I anticipate UNH to deliver upon the price and earnings forecast despite the risk factors (competition, regulation, economic environment). UNH's primary upside catalyst is favorable economics, share buy-backs, and cost management. I anticipate the company to deliver upon my forecasted price target of $132.44 by 2018. This implies a return of 128.65% (including dividends) by 2018. This is a fantastic return for an insurance stock.

Year

Dividend Yield @ $61.67 per share

Cumulative Total

2012

1.38

1.38

2013

1.59

1.59

2014

1.83

3.41

2015

2.10

5.51

2016

2.41

7.92

2017

2.78

10.70

2018

3.19

13.89

A higher yielding investment opportunity albeit having a higher risk is to buy the Jan. 17, 2015 calls at the $65.00 strike. The call premiums trade at $5.75. The price forecast for the end of 2014 is $84.87. The rate of return if the calls expire at $84.87 is 245.57%, the option will break even when the stock trades at $70.75.

The risk-to-reward on the option is exceptional. The risk is reasonable (0.9 beta).

UnitedHealth Group has a market capitalization of $63.2 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity.

Conclusion

UnitedHealth Group was seen as a laggard due to healthcare reform. Health insurers will be able to sustain growth due to the improving economy, cost-cutting, and added demand caused by the healthcare mandate.

The conclusion is clear: Buy UnitedHealth Group.

Source: UnitedHealth Group: Put Healthcare Reform Into Perspective