UnitedHealth Aces Growth Physical

10/17/2011


  Recent Price
$47
  Dividend
$0.65
  Yield
1.4%
  P/E Ratio
10
  Shares (millions)
1,094
  Long-Term Debt as % of Capital
26%
  52-Week Price Range
$53.50 - $34.44

Threats of health reform aside, UnitedHealth Group ($47; UNH) is thriving. In the 12 months ended June, per-share profits jumped 23% and operating cash flow jumped 14%.

With the second-highest number of enrolled customers in the highly fragmented U.S. managed-care market, UnitedHealth is an industry leader with a persistently high Quadrix Overall score and sturdy balance sheet. The company has proved itself adaptable and seems well-positioned to deal with whatever health reform eventually passes into law.

The stock's valuation already reflects political uncertainty. At 10 times trailing earnings, UnitedHealth trades at a 9% discount to its five-year average P/E ratio. The stock also looks cheap relative to its history as measured by price/sales, price/cash from operations, and price/book.

The stock has held up fairly well during the market's recent downturn and advanced 29% so far this year. UnitedHealth Group is a Buy and a Long-Term Buy.

Business breakdown

The health-benefits unit (77% of sales in the first half of 2011, 85% of operating income) coordinates health services for employers, retirees, and state Medicaid programs. In the past few years, more customers have delayed surgeries and avoided doctor visits, benefiting UnitedHealth. Typically, 80% to 85% of premiums pay for health services delivered to customers; in the first half of 2011 that rate dipped to 81%.

Premiums derived from Medicare and Medicaid services accounted for 27% of health-benefits revenue last year. Medicare Advantage reimbursements for 2011 fell 1.6%, on top of a 5% cut in 2010. More cuts are expected next year. UnitedHealth's Medicare Advantage membership is up 7% over the last year, while its Medicaid count is up 8%.

UnitedHealth generates the remainder of its revenue from specialized benefits, such as dental and vision coverage, and such services as processing electronic payments and managing flexible spending accounts and pharmacy benefits.

Dealing with reform

The insurance industry is bracing for annual excise taxes, starting with $8 billion in 2014. Costs related to medical devices and prescriptions are also set to increase.

These factors could eat into UnitedHealth's profits. For example, a 1% increase in medical costs without a proportional change in revenue would have reduced 2010 net earnings by $190 million, or $0.17 per share. Still, health reform could be an overall positive for medical insurers. The federal government estimates 32 million people could gain coverage if reform keeps its current form. And UnitedHealth plans to offset the new expenses by raising premiums.

Conclusion

For the September quarter, UnitedHealth is expected to report earnings of $1.11 per share, down 3%, on 7% higher sales. Wall Street sees profit growth of 9% in 2012, with sales up 7%. 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
Jun '11
1.16
vs.
0.99
+ 8%
52.64
-
43.30
12 - 10
Mar '11
1.22
vs.
1.03
+ 10%
45.75
-
36.37
11 - 9
Dec '10
0.94
vs.
0.81
+ 10%
38.06
-
33.94
10 - 9
Sep '10
1.14
vs.
0.89
+ 9%
35.94
-
27.13
10 - 7
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
94.16
4.10
0.38
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
2007
75.43
3.42
0.03
59.46
-
45.82
17 - 13
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
94
60
72
86
53
9
84

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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