United Health Group Inc. (UNH)

[Stockowner]

That is a sick stock.

I wholeheartedly agree. Is it a sick company, though?

[npg]

Buffett thought that at 45$ UNH was cheap. I would not be surprised if he now adds to the position.

Managed health care currently experienced some margin erosion and got beat down for it. That is across the board. However, I don't think that such a huge drop is justified. It is totally disproportionate. There is some evidence of the drop being due to emotional reasons (read irrationality).

Regardless, it is still a very good business with returns ranging from 14% to 25%. Historically the valuation ratios (P/E) ranged from 16 - 28. At a P/E around 6 this is way too low. You don't need to do any calculations to see that this one is dirt cheap.

I am going to swap out of WMT (for a 35% profit) into UNH. It may take a while to play out, but that's an opportunity I simply cannot pass.

[adampepp]

NPG,

I agree - I current own a small position in UNH and since I've been following this stock, it's been hammered with tons of bad news. However, the options backdating scandal is now behind them, the medicaid cut bill already passed (should only take a very small amount off of UNH's bottom line), and healthcare has already had their double-reduced estimates for the year. The worst is behind them for now.

Management is sub-par as well, but this company has such a great cost structure and moat that it will continue to throw off owner earnings regardless.

This stock won't go anywhere soon but its a quality play at $23 (priced for no growth, which is absurd).

Adam

[Straddle]

What MOS price you guys have for this stock? The one I calculated is way under the current stock price.

[Gunnski]

Using numbers from MSN Finance & input into Phil Town's calculator for MOS:

$41.45

[adampepp]

Using a DCF analysis, assuming a VERY conservative 6% increase in FCF for the next 10 years, then 3% for 10-20, discounted at 15%, then UNH has a sticker value of $46/share, or a MOS of $23/share (right where we are now).

Since I like to model worst case scenarios, even if UNH didn't grow at all in the next 10 years, their shares would still be worth $39. UNH would have to DECREASE FCF by about 17% for the next 10 years for the shares to be worth $23, and thats still assuming a 15% discount rate.

Anyhow, lets assume the most likely possibility that they grow FCF at 6%. A DCF analysis, Graham analysis, Phil Town analysis, and Morningstar, they all put the fair value in the $46-$56 range, which gives me a lot of confidence that the valuation is correct and we are really buying $0.50 for $1.00.

Adam

[npg]

Of course you are. When that sort of thing happens one will just know it to be true. No need for a spreadsheet there.

It's just plain obvious.

[sanjayshetty]

your numbers are bang on, however I have a question for the people here since I'm not too familiar with this company.

Could you tell me what defines the MOAT of this company? What makes it unique? Or could you point to a source of information regarding the same. Thanks.

[adampepp]

Sanjay,

UNH has classic "Network" moat in which customers benefit from the large network of available doctors, etc. Additionally, also because of its size, UNH has an economies of scale moat in which they can add additional clients at very low cost. Finally, most customers are locked in because of their employers, so there are high switching costs. This is a type of company in which an idiot could be CEO and they would still make money.

The biggest threat to their moat is government regulation which could interfere with their profitability. However, health care spends a ridiculous amount of money on lobbying, so it would be a long, drawn out process to get anything changed (with all the doctors associations, etc pulling different directions).

Adam

[sanjayshetty]

Thanks for the Quick Response :-)

Originally Posted by adampepp

Sanjay,

UNH has classic "Network" moat in which customers benefit from the large network of available doctors, etc. Additionally, also because of its size, UNH has an economies of scale moat in which they can add additional clients at very low cost. Finally, most customers are locked in because of their employers, so there are high switching costs. This is a type of company in which an idiot could be CEO and they would still make money.

The biggest threat to their moat is government regulation which could interfere with their profitability. However, health care spends a ridiculous amount of money on lobbying, so it would be a long, drawn out process to get anything changed (with all the doctors associations, etc pulling different directions).

Adam