Going Long With United Health

| About: UnitedHealth Group (UNH)
Company Overview: UnitedHealth Group Incorporated provides healthcare services in the United States. The company’s Health Benefits segment offers consumer-oriented health benefit plans and services; administrative and other management services; and non-employer based insurance options for purchase by individuals. It also provides health and well-being services for individuals aged 50 and older, as well as to large national employers, public sector employers, mid-sized employers, small businesses, and individuals; health insurance products and services; and network-based health and well-being services to beneficiaries and other government-sponsored health care programs. As of December 31, 2009, this segment offers its services through approximately 700,000 physicians and other health care professionals, and 5,200 hospitals. Its OptumHealth segment provides health, financial, and ancillary services and products that assist consumers through personalized health management solutions; benefit administration, and clinical and network management; health-based financial services; behavioral solutions; and specialty benefits, such as dental, vision, life, critical illness, short-term disability, and stop-loss product offerings.
Prognosis: Although the stock is up approximately 20% since the Health Care Reform reconciliation passage, it is down roughly 10% since early this year and has been cut in half from the level it reached n 2006.
Valuation: UNH is selling for approximately 9 times this year’s consensus earnings and 9 times next year’s projected earnings. It is selling at the low end of its five year range valuation based on P/E, P/S, P/B, and P/CF. It is selling at .4 times sales and 6 times operating cash flow. It sports a small 1.5% dividend yield.
Catalysts: There are several factors that we believe should provide support for a higher stock price in the near and medium term:
1. The coming realignment in the November midterms should buoy the prospects for the Healthcare, Utility and Energy sectors
2. Company consistently beats earnings estimates by wide margins and estimates for 2010 and 2011 have steadily climbed in the last ninety days
3. Has shown an ability to maintain its Medical Loss Ratios below Health Care Reform’s MLR floor giving it flexibility to add benefits to increase its competitive strength
Recommendation(s): Given its rising revenue streams, low valuation and strong cash flow; we feel the stock is currently undervalued. In our opinion, the stock should be trading at 11-13 times earnings (The low end of its historical valuation) of $3.60. Our target Price is $40-$47, up from the current price of $32.03.
Disclosure: Long UNH

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