Fair Value Unchanged By WellPoint's Hiring Of New CEO [View article]
Hi Poppapuff,
Thanks a lot for your comment. Just want to let you know that I'm researching into this and going through past transcripts. I will reply once I have a firm idea.
Fair Value Unchanged By WellPoint's Hiring Of New CEO [View article]
Hi Vireoman,
Thanks a lot for your reply. I agree with you that this is a choice time will tell. Carlson might very well be a decent choice but Swedish's hiring brings about a shift in focus. I think this shift sounds right.
Oracle Is A Decent GARP Stock That Offers 30 Percent Upside [View article]
Hi RM1,
Thanks for your comment. The point about market cap is indeed interesting. Google finance shows that there are only 29 companies with market cap>$150bn. I think that's probably explains why my model can't really use a long-term FCFF growth of 5%, which suggests a $300bn market cap at fair value, ranking the 5th on the market and second only to AAPL in tech stocks. However, I think 30% upside to $200bn is possible. There are still 19 names with market cap >$200bn.
As for margin contraction, I think top line is more sensitive than margin because companies who should factor in the high maintenance cost while they are making the initial purchase decision. Clients' bargaining power is smaller if they have already adopted Oracle systems. My model forecast operating margin to decrease to 36% by 2017 in the base case. If we assume it decrease to 33% by then (1 percentage reduction a year), fair value estimate is revised down to $43. The fair value is about $35 if the margin contraction is 3% a year, which is a sharp contraction usually accompanied with worsening fundamentals.
Oracle Is A Decent GARP Stock That Offers 30 Percent Upside [View article]
Hi Joe,
I do not invest any money in stocks right now for personal reasons which I do not feel comfortable to share. Furthermore, I think this makes it easier for me to be objective. I do stand by my recommendations and I keep track of my scores. You can check it out here. I might start investing real money in the future and if so I will disclose it.
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
Hi Markb,
Thank you for your question and sorry that I took me a few days to reply to it. This is a key point that is worth some research beforehand.
My article is based on two opinions of mine. 1) The impact of mandated inclusion on the healthcare insurance industry is going to be modestly negative and the impact of such has been fully priced in. 2) UNH and WLP will do better than AET and HUM.
The first point seems to be what many people disagree with. No one can forecast the future with certainty, i.e. precisely how sick this part of the population are, how many of them will buy insurance vs. paying the fine and how that will impact the topline and MLR. However, people have made a variety of projections, the extreme case of which is that healthcare insurance companies will extinct. http://nyti.ms/W0yphn
I think the negative impact is going to be modest for a number of reasons: 1) Adverse selection has been a problem of medicare advantage for years. Firms that focus on medicare, such as HUM and CVH, don't have their MLRs out of whack. 2) I have never seen an industry extincted entirely due to government policies as opposed to market forces. Kodak went down because people prefer to buy digital cameras. Dell is struggling because tablets sell. Government policies can support a dying industry, i.e. defense or agriculture. Funny enough, government policies usually have unintended consequences that work to the opposite of what is intended. I think, in this case it would be that the big gets bigger. 3) All the media coverage about ACOs and fee-for-service models are informative, but don't forget that UNH and WLP are not late on this either with Optum and acquisition of Caremore, respectively. 4) Corporations are for profits by definitions. I can guarantee you that they will find ways to exclude people with pre-conditions and be "creative" with new plan offerings that would circumvent regulations. Plus how state government will enforce such rules is still a question mark. I trust corporate America's ability to outsmart bureaucrats and politicians.
At the end of the day, whether to invest in UNH and WLP does come down to whether you think the market has been over-pessimistic or over-optimistic about the future of healthcare insurance industry. I think the market has been unreasonably bearish about this.
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
Hi Jacobtr,
I agree that Markb's question is a good one to address, which I will in a longer thread later on. Just one quick note to the example you provided regarding banks making bad loans. I don't think that's because of pressure from governments. It is simply because the huge profit in underwriting bad loans and repackaging them as MBS pre-2007.
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
Hi Jacobtr,
Good point here. Most big insurers have EBIT margins under teens and net margins even lower. It's a tough business to be in and even tougher because of PPACA. Because of that, big ones are more resilient than small, regional ones. AMA has long been complaining about industry consolidation. I see this trend to continue unless the federal and state governments do something about it.
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
Hi Ghaukness0929,
Thanks a lot for your note. Please refer to my above reply to Chubby Lipshitz on global expansion. In short, I plan to write a follow-up article on that.
Your replies have been quite insightful. I'm not so familiar with tech analysis but it's good to get some opinions on that.
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
Hi Vireoman,
Thanks a lot for your note. Please refer to my above reply to Chubby Lipshitz on global expansion. In short, I plan to write a follow-up article on that.
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
Furthermore, below are some slides prepared by PwC and Accenture to encourage insurance companies (not just healthcare insurers) to go global. These materials could certainly be biased, but might be a good point to start the research.
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
Hi Chubby Lipshitz,
I like that you mentioned about international expansion. This is one topic I pondered upon while comparing UNH to CI. I may write a follow-up article exploring whether going global is a sound strategy for the big insurers. I have some initial thoughts about it, which may change later on: risk-based business in a foreign country needs to be above certain size, otherwise you are adding risk to the multi-national company as opposed to diversifying risk. Building up fee-based business in foreign businesses may be difficult due to local regulations, corruptions and scale advantages of competitors.
Staples Restructuring Offers A Buying Opportunity Anew [View article]
Hi Intangible Valuation,
Just a quick response to the cost of equity part. I use WACC as the discount factor which considers the equity and debt allocation. The WACC is calculated to be 9.12% with 71.03% equity and 28.97% debt. I use 6.80% as cost of debt. I think a discount factor of 9.12% is reasonable for Staples.
Staples Restructuring Offers A Buying Opportunity Anew [View article]
Hi Intangible Valuation,
I disagree with you that they are doing the right thing. International segment is clearly losing money while North America has held up okay. Yet they are downsizing stores much more aggressively in North America? The slower pace of lease renewal is sort of an excuse here. I think they are running out of cards.
I warned about the impairment in my 9/11 article (http://seekingalpha.co...). The amount is more than twice as much as what they said were close to under water ($790 million to $850 million vs. $315 million). All of these make me worry.
There are companies which announced a turnaround plan and succeeded, such as eBay (http://bit.ly/SAYhiN). But Staples' plan is not nearly as solid as eBay's .
Fair Value Unchanged By WellPoint's Hiring Of New CEO [View article]
Thanks a lot for your comment. Just want to let you know that I'm researching into this and going through past transcripts. I will reply once I have a firm idea.
Best,
Alex
Fair Value Unchanged By WellPoint's Hiring Of New CEO [View article]
Thanks a lot for your reply. I agree with you that this is a choice time will tell. Carlson might very well be a decent choice but Swedish's hiring brings about a shift in focus. I think this shift sounds right.
Best,
Alex
Oracle Is A Decent GARP Stock That Offers 30 Percent Upside [View article]
Thanks for your comment. The point about market cap is indeed interesting. Google finance shows that there are only 29 companies with market cap>$150bn. I think that's probably explains why my model can't really use a long-term FCFF growth of 5%, which suggests a $300bn market cap at fair value, ranking the 5th on the market and second only to AAPL in tech stocks. However, I think 30% upside to $200bn is possible. There are still 19 names with market cap >$200bn.
As for margin contraction, I think top line is more sensitive than margin because companies who should factor in the high maintenance cost while they are making the initial purchase decision. Clients' bargaining power is smaller if they have already adopted Oracle systems. My model forecast operating margin to decrease to 36% by 2017 in the base case. If we assume it decrease to 33% by then (1 percentage reduction a year), fair value estimate is revised down to $43. The fair value is about $35 if the margin contraction is 3% a year, which is a sharp contraction usually accompanied with worsening fundamentals.
Oracle Is A Decent GARP Stock That Offers 30 Percent Upside [View article]
I do not invest any money in stocks right now for personal reasons which I do not feel comfortable to share. Furthermore, I think this makes it easier for me to be objective. I do stand by my recommendations and I keep track of my scores. You can check it out here. I might start investing real money in the future and if so I will disclose it.
http://bit.ly/14KKU2J
Best,
Alex
Oracle Is A Decent GARP Stock That Offers 30 Percent Upside [View article]
Thanks a lot for pointing that out. I have submitted a correction. Sorry about the mistake.
Best,
Alex
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
Please refer to my reply to Markb. I stated my case there.
Best,
Alex
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
Thank you for your question and sorry that I took me a few days to reply to it. This is a key point that is worth some research beforehand.
My article is based on two opinions of mine.
1) The impact of mandated inclusion on the healthcare insurance industry is going to be modestly negative and the impact of such has been fully priced in.
2) UNH and WLP will do better than AET and HUM.
The first point seems to be what many people disagree with. No one can forecast the future with certainty, i.e. precisely how sick this part of the population are, how many of them will buy insurance vs. paying the fine and how that will impact the topline and MLR. However, people have made a variety of projections, the extreme case of which is that healthcare insurance companies will extinct. http://nyti.ms/W0yphn
I think the negative impact is going to be modest for a number of reasons:
1) Adverse selection has been a problem of medicare advantage for years. Firms that focus on medicare, such as HUM and CVH, don't have their MLRs out of whack.
2) I have never seen an industry extincted entirely due to government policies as opposed to market forces. Kodak went down because people prefer to buy digital cameras. Dell is struggling because tablets sell. Government policies can support a dying industry, i.e. defense or agriculture. Funny enough, government policies usually have unintended consequences that work to the opposite of what is intended. I think, in this case it would be that the big gets bigger.
3) All the media coverage about ACOs and fee-for-service models are informative, but don't forget that UNH and WLP are not late on this either with Optum and acquisition of Caremore, respectively.
4) Corporations are for profits by definitions. I can guarantee you that they will find ways to exclude people with pre-conditions and be "creative" with new plan offerings that would circumvent regulations. Plus how state government will enforce such rules is still a question mark. I trust corporate America's ability to outsmart bureaucrats and politicians.
At the end of the day, whether to invest in UNH and WLP does come down to whether you think the market has been over-pessimistic or over-optimistic about the future of healthcare insurance industry. I think the market has been unreasonably bearish about this.
Best,
Alex
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
I agree that Markb's question is a good one to address, which I will in a longer thread later on. Just one quick note to the example you provided regarding banks making bad loans. I don't think that's because of pressure from governments. It is simply because the huge profit in underwriting bad loans and repackaging them as MBS pre-2007.
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
Good point here. Most big insurers have EBIT margins under teens and net margins even lower. It's a tough business to be in and even tougher because of PPACA. Because of that, big ones are more resilient than small, regional ones. AMA has long been complaining about industry consolidation. I see this trend to continue unless the federal and state governments do something about it.
http://onforb.es/TcpOJd
Best,
Alex
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
Thanks a lot for your note. Please refer to my above reply to Chubby Lipshitz on global expansion. In short, I plan to write a follow-up article on that.
Your replies have been quite insightful. I'm not so familiar with tech analysis but it's good to get some opinions on that.
Alex
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
Thanks a lot for your note. Please refer to my above reply to Chubby Lipshitz on global expansion. In short, I plan to write a follow-up article on that.
Alex
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
http://pwc.to/10NfoTq
http://bit.ly/UN7P9m
UnitedHealth And WellPoint Are Well-Positioned For Obamacare [View article]
I like that you mentioned about international expansion. This is one topic I pondered upon while comparing UNH to CI. I may write a follow-up article exploring whether going global is a sound strategy for the big insurers. I have some initial thoughts about it, which may change later on: risk-based business in a foreign country needs to be above certain size, otherwise you are adding risk to the multi-national company as opposed to diversifying risk. Building up fee-based business in foreign businesses may be difficult due to local regulations, corruptions and scale advantages of competitors.
Best,
Alex
Staples Restructuring Offers A Buying Opportunity Anew [View article]
Just a quick response to the cost of equity part. I use WACC as the discount factor which considers the equity and debt allocation. The WACC is calculated to be 9.12% with 71.03% equity and 28.97% debt. I use 6.80% as cost of debt. I think a discount factor of 9.12% is reasonable for Staples.
Staples Restructuring Offers A Buying Opportunity Anew [View article]
I disagree with you that they are doing the right thing. International segment is clearly losing money while North America has held up okay. Yet they are downsizing stores much more aggressively in North America? The slower pace of lease renewal is sort of an excuse here. I think they are running out of cards.
I warned about the impairment in my 9/11 article (http://seekingalpha.co...). The amount is more than twice as much as what they said were close to under water ($790 million to $850 million vs. $315 million). All of these make me worry.
There are companies which announced a turnaround plan and succeeded, such as eBay (http://bit.ly/SAYhiN). But Staples' plan is not nearly as solid as eBay's .
Thanks,
Alex