Reform Scrum Won't Sack UnitedHealth

2/4/2013


  Recent Price
$56
  Dividend
$0.85
  Yield
1.5%
  P/E Ratio
11
  Shares (millions)
1,037
  Long-Term Debt as % of Capital
30%
  52-Week Price Range
$60.75 - $50.32

UnitedHealth Group ($56; UNH) has grown sales every year since 1990, while cash from operations has declined just twice in the past 25 years. But that's the nature of managed care, a low-margin yet steady business. UnitedHealth is not only the industry's biggest company but also its most consistent profit grower.

With about 70% of its 2013 business priced, UnitedHealth reports pricing trends stronger than last year's. Management sees sales climbing 11% to 12%, helped by an acquisition in Brazil, while operating cash flow is projected to climb 1% to 6%.

In January, the insurer reiterated its 2013 target for per-share profits of $5.25 to $5.50, versus the consensus of $5.52 and the $5.28 earned in 2012. It also expressed confidence about growing profits in 2014, easing some concerns about the Affordable Care Act. UnitedHealth has a history of issuing conservative guidance, then raising its outlook throughout the year. At 11 times trailing earnings, 29% below its 10-year average, the stock is rated a Focus List Buy and a Long-Term Buy.

Business breakdown

UnitedHealth relies more on commercial business than most major rivals, with 66% of its members enrolled in such plans. That means UnitedHealth won't capture the lion's share of the up to 30 million new patients expected to receive health insurance in connection with the Affordable Care Act. But it also limits execution risks.

Health reform will expose insurers to both added costs and uncertainties, particularly with regard to health exchanges intended to help individuals and small businesses shop for coverage. UnitedHealth generates just 10% of its profits from these two groups and plans to participate in just 10 to 25 exchanges, set to launch in 2014.

UnitedHealth took a 65% stake in Brazil insurer Amil Participacoes S.A. in the December quarter. It plans to purchase an additional 25% interest in the first half of 2013, bringing its total investment in the company to about $4.3 billion after Brazilian tax benefits. Providing medical benefits to more than 4.4 million people, Amil controls 9% of Brazil's managed-care market. Brazil's government is trying to increase the reach of managed care, currently used by just 25% of the country's 200 million residents.

Buybacks have lowered the share count for 24 straight quarters, reducing outstanding shares by a total of 26% over the six-year period. Those repurchases look like a smart investment, considering UnitedHealth paid an average of $42 per share. UnitedHealth bought roughly $3 billion worth of shares in each of the past two years, and management plans 2013 spending near that level. At current prices, $3 billion in buybacks would lower the share count by 5%.

Investors should also expect a double-digit dividend hike by the middle of 2013, based on hikes of 23% and 31% in the past two June quarters and management's 2013 spending target of roughly $900 million for dividends, versus $820 million last year spread over a larger number of shares.

An annual report for UnitedHealth Group Inc. is available at 9900 Bren Road E., Minnetonka, MN 55343; (952) 936-1300; www.unitedhealthgroup.com.

UNITEDHEALTH GROUP
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '12
1.20
vs.
1.18
11%
58.29
-
50.32
11 - 10
Sep '12
1.50
vs.
1.17
8%
60.75
-
50.89
12 - 10
Jun '12
1.27
vs.
1.16
8%
59.71
-
50.68
12 - 11
Mar '12
1.31
vs.
1.22
7%
54.18
-
43.42
11 - 9
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
110.62
5.28
0.80
60.75
-
49.82
12 - 9
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
-
16.11
10 - 5
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
82
63
89
84
56
9
28

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


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