We See Lots To Like At UnitedHealth

6/25/2012


  Recent Price
$60
  Dividend
$0.85
  Yield
1.4%
  P/E Ratio
13
  Shares (millions)
1,060
  Long-Term Debt as % of Capital
28%
  52-Week Price Range
$60.75 - $41.27

UnitedHealth Group ($60; UNH) shares have surged 19% this year, eclipsing the 9% gain for the S&P 1500 Health Care Sector Index. The shares now trade at nearly 13 times trailing earnings, above the five-year average of 10 but below the 10-year average of 16. However, UnitedHealth is expected to grow per-share profits 5% this year, while the median S&P 1500 managed-care stock is projected to post a 3% decline. Despite its superior outlook, UnitedHealth trades in line with its peers.

Two catalysts will likely influence the stock's near-term direction: the Supreme Court decision on health reform and the pace at which medical-utilization rates revert to historical norms. Regardless of how those issues play out, UnitedHealth still stands to benefit from a series of recent contract awards. UnitedHealth Group is a Buy and a Long-Term Buy.

Business breakdown

The largest U.S. health insurer by sales and stock-market value, UnitedHealth's network spans nearly 5,400 hospitals and 754,000 physicians and other health professionals. The majority of UnitedHealth's business involves medical insurance (77% of sales in 12 months ended March, 86% of operating profits). That unit derives about 48% of its revenue from commercial payers, with the rest coming from Medicare (38%) and Medicaid (14%).

In recent years, most of the company's growth has sprung from its Optum unit (23% of sales, 14% of operating profits), which provides services related to prescription drugs, behavioral health, and data management. UnitedHealth expects Optum's operating profits to double by 2015.

The Supreme Court is expected to deliver its decision on health reform in the next few weeks. In a worst-case scenario, the court upholds all of the legislation except the individual mandate — effectively forcing insurers to enroll patients with pre-existing conditions without allowing an influx of healthier members to offset the higher costs. UnitedHealth says it will continue to offer some of the insurance benefits mandated by the law regardless of the Supreme Court's decision.

Low utilization rates have bolstered the bottom line for health insurers in recent quarters. UnitedHealth estimates that a 1% increase in medical costs for commercial insured patients would have lowered 2011 net income by $215 million (roughly 4% of the annual total). Envisioning modestly higher utilization this year, UnitedHealth has raised premiums.

Conclusion

After experiencing strong enrollment growth in the March quarter, UnitedHealth raised its 2012 target for member growth to 5%. Recent contracts in Hawaii, Washington, and Ohio should help drive membership. UnitedHealth also won a five-year contract valued at $1.4 billion to provide coverage to 2.9 million members of the military and their families.

On June 6, UnitedHealth boosted its quarterly dividend more than 30%. The company also authorized the repurchase of 110 million shares, more than 10% of the share count. An annual report for UnitedHealth Group Inc. is available at 9900 Bren Road East, Minnetonka, MN 55343; (952) 936-1300; www.unitedhealthgroup.com.

UNITEDHEALTH GROUP
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '12
1.31
vs.
1.22
+ 7%
59.43
-
49.82
13 - 11
Dec '11
1.18
vs.
0.94
+ 8%
51.71
-
41.32
12 - 9
Sep '11
1.17
vs.
1.14
+ 7%
53.50
-
41.27
12 - 9
Jun '11
1.16
vs.
0.99
+ 8%
52.64
-
43.30
12 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
101.86
4.73
0.61
53.50
-
36.37
11 - 8
2010
94.16
4.10
0.41
38.06
-
27.13
9 - 7
2009
87.14
3.24
0.03
33.25
-
16.18
10 - 5
2008
81.19
2.95
0.03
57.86
-
14.51
20 - 5
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
92
61
65
86
55
90
81

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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