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Follows Benjamin Graham method, deep value, value, long-term horizon
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The healthcare industry is poised to potentially see some major changes in the future, and some may be tempted to speculate about those changes and how they will affect specific companies. Intelligent Investors know to avoid such speculation by basing their analysis on fundamentals and factual data. Each investment opportunity must be evaluated in order to determine if the company is trading below its intrinsic value. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how UnitedHealth Group (NYSE:UNH) fares in the ModernGraham valuation model.

UNH Chart

UNH data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price$73.52
MG Value$141.46
MG OpinionUndervalued
Value Based on 3% Growth$71.78
Value Based on 0% Growth$42.08
Market Implied Growth Rate3.18%
NCAV-$29.71
PEmg14.85
Current Ratio0.73
PB Ratio2.26

Balance Sheet - 12/31/2013

Current Assets$20,380,000,000
Current Liabilities$27,881,000,000
Total Debt$14,891,000,000
Total Assets$81,882,000,000
Intangible Assets$35,448,000,000
Total Liabilities$49,733,000,000
Outstanding Shares988,000,000

Earnings Per Share

2013$5.50
2012$5.28
2011$4.73
2010$4.10
2009$3.24
2008$2.40
2007$3.42
2006$2.97
2005$2.48
2004$1.97
2003$1.48
2002$1.06

Earnings Per Share - ModernGraham

2013$4.95
2012$4.43
2011$3.87
2010$3.36
2009$2.97
2008$2.77

Dividend History

UNH Dividend Chart

UNH Dividend data by YCharts

Conclusion:

UnitedHealth Group is suitable for the Defensive Investor, and by default is also suitable for the Enterprising Investor. The company passes all of the requirements of the Defensive Investor except the current ratio requirement. The Enterprising Investor normally would like to see lower debt levels relative to the current assets, but is willing to overlook that in this case because the company passes so many requirements for the Defensive Investor. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should feel very comfortable proceeding with further research into the company. Such research should also include a review of other companies that pass these requirements, through a review of ModernGraham Stocks & Screens.

As for a valuation, the company has grown its EPSmg (normalized earnings) from $2.77 in 2008 to $4.95 for 2013. This is a solid level of growth that outpaces the market's implied estimate for growth of only 3.18% and leads the ModernGraham valuation model to return an intrinsic value that is greater than the market price. As a result, the company appears to be undervalued at this time.

The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on UnitedHealth Group? Where do you see the company going in the future? Is there a company you like better?

Disclosure: The author did not hold a position in UnitedHealth Group (UNH) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.