UnitedHealth Is A Victim Of The Economy, Not A Sell

Oct.19.11 | About: UnitedHealth Group (UNH)

Let's take a look and see if you should still be positive about UnitedHealth Group (NYSE:UNH).

The current US economic situation is not at all good, and both the high unemployment and the high personal debt contribute to the stagnant economic conditions. I think it is doubtful any company would be able to grow smoothly at this moment.And that reflected in the Q3 results of the company.

Although the total revenues increased to $25.3 billion this quarter, compared to $23.7 billion in the year-ago same quarter, and a slight increase from $25.2 billion the previous quarter this year. Yet, the net income margin has gone down to 5%, compared to 5.4% last year's same quarter. This is attributed to rising medical costs and some healthcare use picking up. In fact, the medical claims rose up by 7% to $18.41 billion against the last year's quarter. Utilization expenditure for doctors' offices and outpatient care is still not up to expectations.

The largest segment of UnitedHealth Group, UnitedHealthcare, showed around a 6% increase to $23.6 billion compared to that in last year. But what about the decrease from $23.7 billion in the previous quarter this year? Even the operating margin of 7.4% has gone down from 8.2% in the same quarter last year. This can be attributed to weakening demand for healthcare benefits by employers for their employees, not to mention the confusion about Medicare among baby boomers after the 2010 reform.

Somehow the Optum segment's performance is still strong, with revenues touching $7.2 billion this quarter, compared to $5.9 billion the same quarter one year ago and $7 billion in the previous quarter the same year. The operating margin is hit even in this segment.

We shouldn't judge the company's performance based on this quarterly report. Let's give the company's annual performance a look as well.

Revenues from UnitedHealthcare steadily rose for the last 3 years, to $87.44 billion in 2010 from $75.86 million in 2008, showing an increase of over 10%. Even the operating margin increased to 7.6% last year from 6.7% in 2008. But the operating margin of OptumHealth has steadily gone down to 10.4% in 2010, compared to 13.7% in 2008.

But on further research, it can be said that it is more to do with the industry and the economy, rather than the company. If we look carefully, its return on assets of 7.59x is much better than 4.63x of Aetna Inc. (NYSE:AET), 5.64x of WellPoint Inc (WLP)and 3.04x of CIGNA Corp (NYSE:CI). Even its EBITD margin of 25.77% is pretty decent, compared to the 6.25x of Humana Inc., one of its strongest competitors.

So, going by the figures, all I can say is that the macro environment is to blame here. You should hold on to UNH stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.