Stock of the Week
NYSE Symbol: UNH
Industry: healthcare HMO
Price as of 7/2: $56.26
Thanks to a nice turnaround on Thursday and a nearly 300 point rally on Friday the major averages saved what was an ugly quarter. After a dismal month of May, June turned in its' best performance in over a decade as the major averages rallied over 1.9% or better in just the last week. Still, the major averages declined for the second quarter with the S&P 500 falling 3.3% and the Nasdaq declining 5%. Year to date the numbers look much better with the Dow up 5.4%, the S&P 500 up 8.3% while the Nasdaq is still up a whopping 12% (Thank you Apple). Looking forward, the second quarter earnings could make or break this market. Earnings season will start next week with Alcoa. Slowing growth in Europe and Asia could cause companies to cut full year guidance. We've already had a few preannouncements from the likes of Ford, PG, and Nike. Besides the rebound in the major averages, last week also brought the Supreme Court decision to up hold most of Obama-care. The HMOs sold off sharply following the ruling which may be providing a buying opportunity. This week's featured stock is HMO, Unitedhealth Group. It's true Obama-care will drive up costs for the HMOs and Unitedhealth Group, but longer term there should be plenty of changes to this piece of legislation. Also the demographics are in the HMOs favor with plenty of profit potential in the coming decades as the baby boomers head into retirement.
Back in April, UnitedHealth reported spectacular earnings as net income rose to $1.39 billion, or $1.31 per share, from $1.35 billion, or $1.22 per share, a year earlier, easily beating estimates by 14 cents. Revenue rose 7 percent to $27.28 billion, slightly ahead of Wall Street's target. As one analyst put it, the company's firing on all cylinders, way ahead of its competitors. The chief investment officer admitted it was pretty hard to find any fault with the quarter. Membership stood at 35.57 million at the end of March, up about 5 percent from a year earlier. Overall, the company expects to gain 1.7 million to 1.9 million members this year, an increase of more than 750,000 from its previous forecast. Earnings did fall 22% to $252 million in Optum line of health service businesses, which include data and analytics, pharmacy benefits, and other technology services. But the company backed its previous projection that it would more than double Optum's 2011 operating earnings by 2015. Going forward, UnitedHealth raised its 2012 earnings forecast to a range of $4.80 to $4.95 per share. Analysts have been looking for $4.84. Following the earnings, Unitedhealth hiked their dividend in June by 30% while also initiating a share buyback. Sounds like a lot of good news, however with the recent Supreme Court decision, the stock is right back to the March and May lows.
Currently, Unitedhealth Group is trading for 11 times earnings, 10 times next year earnings, 0.6 times sales, and 2 times book value of $28 a share. With the recent pull back in the stock, the yield is approaching 2%. Cantor Fitzgerald initiated the stock with a buy rating and a $70 target last month. The firm notes despite tough comparisons because of largely favorable developments in 2011, company continues to outperform the industry. In Barrons over the weekend the same analyst reiterated his recommendation of Unitedhealth Group indicating the company will be able to counter the rising costs with expanding services. In the short term, the stock may remain under pressure, but longer term the stock is providing good value in a defensive sector with a steadily improving dividend yield.