Is UnitedHealth Suddenly a Dangerous Investment?

With shares of UnitedHealth Group Incorporated (NYSE:UNH) trading at around $56.73, is UNH an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

This is a good stock. This is a bad stock. This is a good stock. This is a bad stock. It sounds simplistic and absurd, but that’s the best way to describe how investors have been thinking about UnitedHealth over the past year. Increases in the stock prices have been met with doubt, and decreases in the stock price have been met with potential opportunity. All of this confusion is justifiable considering the current industry environment. Ever since Obamacare became a reality, the stock hasn’t acted the same as it had in the past. There is too much confusion going forward, and investors hate confusion.

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It’s yet to be determined how many new rules will affect UnitedHealth. These new rules include, but are not limited to, a ban on denial of coverage if there is a pre-existing ailment, dependent coverage up to age 26, annual rate review, and setting up security exchanges. We won’t have a clear picture on the effects of these new rules until 2014, which is why UnitedHealth is such a difficult situation to read. The end result is likely to be lower profit margins.

Current challenges for UnitedHealth include more consumers looking for bargains, increased competition, and a shaky global economy. However, it’s not all bad news for UnitedHealth. Medicare may raise payments, UnitedHealth recently won four contracts under a $3.6 billion Arizona Medicaid program, and fundamentals are strong.

The chart below compares fundamentals for UnitedHealth, Aetna Inc. (NYSE:AET), and WellPoint Inc. (NYSE:WLP). These three companies differ in size. UnitedHealth has a market cap of $57.29 billion, Aetna has a market cap of $16.58 billion, and WellPoint has a market cap of $19.80 billion.

UNH

AET

WLP

Trailing   P/E

10.70

10.51

7.96

Forward   P/E

9.47

8.73

7.99

Profit   Margin

5.00%

4.53%

4.30%

ROE

17.94%

16.15%

11.28%

Operating   Cash Flow

 $7.16 Billion

$1.82 Billion

$2.74 Billion

Dividend   Yield

1.60%

1.60%

2.30%

Short   Position

1.30%

6.00%

1.90%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for UnitedHealth is slightly weaker than the industry average of 0.40, but it still qualifies as normal. It’s also stronger than the debt-to-equity ratios for Aetna and WellPoint. However, all three companies have displayed quality debt management.

Debt-To-Equity

Cash

Long-Term Debt

UNH

0.50

$11.44 Billion

$16.75 Billion

AET

0.63

$4.80 Billion

$6.53 Billion

WLP

0.65

$20.62 Billion

$15.54 Billion

 

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T = Technicals Are Strong

UnitedHealth has performed well over a three-year timeframe. That’s the good news. The bad news is that momentum has slowed considerably over the past year.

1 Month

Year-To-Date

1 Year

3 Year

UNH

6.14%

4.59%

3.53%

80.89%

AET

7.29%

9.80%

13.21%

42.86%

WLP

6.20%

8.40%

-4.29%

8.32%

 

At $56.73, UnitedHealth is trading above all its averages.

50-Day   SMA

55.25

100-Day   SMA

54.99

200-Day   SMA

54.95

 

E = Earnings Have Been Impressive               

Revenue and earnings have consistently improved on an annual basis. The big question is whether or not these trends will continue in 2014 and beyond. Nobody knows the answer to that question.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

81.19

87.14

94.16

101.86

110.62

Diluted   EPS ($)

2.40

3.24

4.10

4.73

5.28

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   millions

25.92

27.28

27.26

27.30

28.77

Diluted   EPS ($)

1.18

1.31

1.27

1.50

1.20

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

This article has pertained more to the industry than UnitedHealth itself since industry trends will determine the company’s future more than anything else. As previously stated, we don’t know how it will all play out. However, there is one bit of good news to report, which is that despite these headwinds, companies in the industry are still raising their estimates.

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Conclusion

This is a simple conclusion. UnitedHealth looks good right now, but the future is uncertain. That being the case, UnitedHealth is a WAIT AND SEE.

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