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ModernGraham Valuation: UnitedHealth Group (UNH)

 

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Company Profile (obtained from Google Finance): UnitedHealth Group Incorporated (UnitedHealth Group) diversified health and well-being company. The Company operates in four segments: UnitedHealthcare, which includes UnitedHealthcare Employer & Individual, UnitedHealthcare Medicare & Retirement and UnitedHealthcare Community & State; UnitedHealthcare Community & State; OptumHealth; OptumInsight, and OptumRx. The Company operates these businesses across eight markets: integrated care delivery, care management, consumer engagement and support, distribution of benefits and services, health financial services, operational services and support, health care information technology and pharmacy.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Calculator)

Key Data:

MG Value $140.16
MG Opinion Undervalued
Value Based on 3% Growth $71.53
Value Based on 0% Growth $41.93
Market Implied Growth Rate 2.99%
NCAV -$28.71
PEmg 14.48
Current Ratio 0.76
PB Ratio 2.23

Balance Sheet – 9/30/2013 

Current Assets $21,194,000,000
Current Liabilities $27,867,000,000
Total Debt $14,888,000,000
Total Assets $81,863,000,000
Intangible Assets $35,770,000,000
Total Liabilities $49,847,000,000
Outstanding Shares 998,000,000

Earnings Per Share – Diluted

2013 (estimate) $5.45
2012 $5.28
2011 $4.73
2010 $4.10
2009 $3.24
2008 $2.40
2007 $3.42
2006 $2.97
2005 $2.48
2004 $1.97
2003 $1.48
2002 $1.06

Earnings Per Share – Modern Graham

2013 (estimate) $4.93
2012 $4.43
2011 $3.87
2010 $3.36
2009 $2.97
2008 $2.77

Conclusion:

UnitedHealth is a very attractive company based on both its financials and its valuation.  The company passes most of the tests of the Defensive Investor and the Enterprising Investor, with its only downside the poor current ratio.  The company has a strong dividend history and stable earnings history.  From a valuation standpoint, the company’s growth in EPSmg (normalized earnings) from $2.77 in 2008 to an estimated $4.93 for 2013 is impressive.  As a result of this strong history of growth, the ModernGraham valuation model looks favorably upon UnitedHealth and the company appears to be undervalued.  Investors should pay close attention to UnitedHealth and continue with further evaluation of the company when considering making an investment, while keeping in mind the 7 Key Tips to Value Investing.

What do you think?  Is UnitedHealth undervalued?  Is the company suitable for both Defensive Investors and Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in UnitedHealth at the time of publication and had no intention of purchasing a position in the next 72 hours.

Photo Credit:  Andrew Magill

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