United Health: Good Medicine for Your Portfolio

UnitedHealth Group (UNH) is a leading diversified health and wellness provider. They serve about 70 million people through four major business units:

• Health Care Services
• OptimumHealth
• Ingenix
• Prescription Solutions.

2007 revenues were $75.43 billion and earnings came in at an all-time high of $3.42 /share. Value Line rates UNH as an 'A+' financial strength and assigns it 95th percentile rankings for both earnings predictability and share 'price growth persistence'.

Why then, did these shares hit a new four-year low today? The HMO industry group has hit some tougher times lately. Almost all these companies have lowered their estimates for 2008 and 2009 due to a combination of under-bidding on contract pricing and margin pressures due to increasing costs. There is a chance that congress may curtail the amounts of payments that HMOs receive for treating Medicare patients as well.

If you haven't stopped reading yet- here's why you should be looking at UnitedHealth right now: Valuation.

Here is company data ( sources: MSN MoneyCentral & Value Line) from the start of 2000:

These shares have never been this cheap, ever. The reduced estimates for 2008 and 2009 are now $3.55 and $4.04 respectively.

That makes the P/E < 9.3x this year's and < 8.2x next year's consensus view. The 10-year median P/E has been 19. The lowest previous full-year P/E ever was 2007's 15.3x.

The environment for these shares is not as good as in the past, so Value Line is projecting only a 15 multiple for their 3 – 5 year target pricing. Even 15 times the already reduced 2008 estimate leads to a goal of $53.25 by year-end. That's almost 62% above today's close.

How else can we look at target pricing? At just 0.9x expected sales per share of $69 we'd reach a $62 share price. At a well lower than normal price/book value of 3x, I come up with about $50 /share.

Who else thinks UNH looks good? As of December 31, 2007 some pretty well respected names held positions with shares @ $58.20: Warren Buffett, Ron Muhlenkamp,Wally Weitz, George Soros, David Dreman, Glenn Greenberg, Robert Olstein, Kenn Fisher, Bill Mille.

If you are a value seeker with a reasonable time horizon,United Health shares might be the right medicine for healthy gains. Just a moderate reversion towards historical mean valuation parameters could easily see UNH shares back at $50 - $60 within 12 – 18 months.

Is that farfetched? Hardly. UNH shares have hit peak prices of $57.90 - $64.60 during each calendar year 2004-2005-2006 and 2007. Sales, cash flow, earnings and book value are all higher now than when those prices were achieved.

Disclosure: Author owns shares and is short puts on UNH.

Comments

[Sean O'Grady]

I also see UNH as a great opportunity and I've been buying shares recently. Although there is some uncertainty in the case of UNH, many investors are inappropriately perceiving that uncertainty as risk. As noted above, UNH is financially solid and has high ROEs. I prefer to focus on ROICs which are also high.

[John Egan]

I suspect the pending election of a Democrat is considered a down-side to healthcare. I'm not sure that either Hillary or Barack are intending to screw with their electorate base by shorting the health business. In fact, my feeling is that the GOP has already skinned as much as possible already and they can't do much more.

Thx jegan ;-)

[DanielJacome]

Fellow commenter John Egan nailed it on the head -- shares are cheap b/c investors don't wanna get in front of a health care name like this right before an election....if you can stomach it, why not buy now? Above average company trading at a below market multiple.

[WeezieBenobi]

Shares are cheap because UHC has a poor reputation regarding its customer service. The customer acquisition model follows a pattern of a) lowballing premiums so employers jump on board b) offering abhorrent service to the point that key employees of said employer leave the company to go to other employers with better healthcare c) employer leaves UHC because they realize the point of offering healthcare is to retain employees.

Even the article in a recent Wall Street Journal mentioned the flight of 'disgruntled customers.' That's not an overstatement. They cut corners in their training and service to prop up ROE and have to cut their 'initial' premiums to entice new customers. This just creates a vicious cycle. Couple that with an uncertain political environment and it's no mystery why investors don't bite.

[Paul Price]

Even if everything Weezie said was true...

it is more than reflected in the depressed valuation of UNH shares right now. Buffett owns 6 million shares.

All analyst estimates see record EPS for 2008 and 2009.

[Paul Price]

It was announced today that Warren Buffett [through BRK] added 25% to his position in UNH during the March quarter bringing his holdings to over 7.5 MM shares.

[Paul Price]

UnitedHealth Group Inc. (UNH):

UnitedHealth Group Incorporated cuts 2008 outlook 10% to between $3.55 and $3.60, as decline in subscriptions and employment hurt business. Healthcare insurance provider recently won a contract in Tennessee, expected to bring in an additional $1 billion annually, starting 2009. The company’s earnings were slightly higher at $994 million or $0.80 a share compared to $927 million or $0.78 a share last year, on 7% revenue increase to $20.3 billion.

Wallace Weitz holds 3,678,261 shares of UNH as of 3/31/08. Robert Olstein, George Soros, Dodge & Cox, Chris Davis, Edward Owens, Warren Buffett, David Dreman, Bill Miller, Kenneth Fisher, Glenn Greenberg, Ronald Muhlenkamp, and Ron Baron also own shares of UNH.



UnitedHealth Group Inc. has a market cap of $39.99 billion; its shares were traded at around $32.55 with a P/E ratio of 9.17 and P/S ratio of 0.53. The dividend yield of UnitedHealth Group Inc. stocks is 0.1%.

[truthinvesting]

This was his original write up.eventually one of his writeups will be correct.A stopped clock is right twice a day but wrong the rest of the day

'Healthy' Gains Ahead - UnitedHealth Group - UNH
Posted by: stockdocx99 (IP Logged)
Date: March 2, 2008 12:52PM


UnitedHealth Group: [NYSE:UNH] Feb. 29, 2008 close: $46.48
52-week range: $44.00 [Feb. 13, 2008] - $59.46 [Dec. 24, 2007]

UnitedHealth Group is a major diversified health and wellness organization with estimated revenues of around $80 billion projected for 2008. The company gained tremendous notoriety in early 2006 when its former CEO was forced to resign over back-dated stock option awards.

The company has been a superb growth vehicle over the past years. From [split-adjusted] EPS of $0.22 in 1996 earnings increased each year since then to $3.48/share in 2007. Revenues surged from $11.79 billion 10 years ago to over $75 billion in 2007. Book value/share kept pace with a 10-year gain from $2.97 to $16.60.

After hitting a very recent high of $59.46 last December 24th, UNH shares have sunk to close last week at just $46.48 or < 13.4x 2007's actual reported earnings. The forward P/E is an even lower 11.8x the consensus estimate of $3.96 for 2008. Both the trailing and projected P/Es are the lowest in UNH's entire trading history. Prior to 2007 the smallest annual average P/E for UNH shares had been 16.4x in 2003. 2003 proved to be a great time to load up as UNH shares then went from $19.60 to $64.60 in under three years.

Value Line is conservatively using just a 16.5 multiple to reach their 3 - 5 year target price range of $90 - $120. Value Line assigns UNH shares an 'A+' financial strength rating and 95th percentile ranks for both 'price growth persistence' and earnings predictability. In short, these are high-quality, low beta [0.70] shares at an extremely attractive current valuation.

Heavyweight Shareholders [as of Dec. 31, 2007]:
[Dec. 31, 2007 price: $58.20]

Cap. Research & Mgt. - 5.57%
Marisco Cap. Mgt. - 5.10%
Barclays Global Mgt. - 4.44%
FMR [Fidelity Funds] - 3.66%
Clearbridge Advisors - 3.64%
State Street Corp. - 3.39%
Legg Mason Cap. Mgt. - 3.23%
Vanguard Group - 2.97%

Gurus Owning UNH [as of Dec. 31, 2007]:

Warren Buffett
Robert Olstein
George Soros
Dodge & Cox
Chris Davis
Edward Owens
David Dreman
Kenn Fisher
Glenn Greenberg
Ron Baron
Ron Muhlenkamp
Wallace Weitz
Bill Miller

Forbes [March 10th, 2008 issue] noted that the former CEO grew UNH into the nations largest health care services company and that their new CEO Stephen Helmsley gets no stock options.

Peter H Costa, health care analyst at FTN Midwest was quoted as saying he believes that UNH's problems are now behind it. He noted that UNH is a leader in Medicare Advantage- a federally backed prive health insurance program for the elderly. The AARP just signed up UnitedHealth to offer the program to its members- a huge market.

If UnitedHealth Group trades at just 16.5 times projected estimates of $3.96 for this year we could see a 'healthy' share price of $65.34 or plus 40.5% from last week's quote.

It's not often you can buy a confirmed growth stock at under 12 times forward earnings, especially one with such high quality metrics.

NOTE TO COMMODITY: Warren owns it.

[truthinvesting]

If you read the UNH on my woldwide forum you can see the Rel doctors" that paned this investment. Paul can you finally admit you were mistaken?