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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Unitedhealth Group

September 4th 2009 Unitedhealth Group
NYSE Symbol: UNH
Industry: healthcare
Price of of 9/4: $28.88


Congress will be coming back next week and I'm sure healthcare will be front and center on their agenda. The healthcare stocks have been depressed, but have slowly improved with the growing opposition to the dramatic reform that President Obama wants to accomplish. This week we'll feature one of the largest HMOs in the U.S., Unitedhealth Group. Investors have been wary of Unitedhealth and their competitors, watching the agenda and politics of the healthcare reform. Washington has been scrambling to tame rising health care costs and cover the nation's estimated 46 million uninsured people. As part of that debate, Congress is considering the creation of a government-run health plan to compete with private health insurers and other measures that could hurt the industry. Just this week a key Senate committee indicated that a public healthcare option will not be part of the healthcare package. Good news for Unitedhealth, but the stock has not reacted providing investors with a compelling valuation.
Back in July, Unitedhealth earned $859 million, or 73 cents per share, for the second quarter. That's up from $337 million, or 27 cents per share, a year earlier. Last year's second-quarter results included hefty fees for settlements in two class action lawsuits. The second-quarter premium revenues totaled $19.7 billion, a rise of $1.4 billion, or 8%, from the same period last year. Service revenues were steady at $1.3 billion, while product revenues rose 15% to $49 million due to volume growth in prescription solutions. In the conference call, Unitedhealth said that it now expects 2009 revenue to be at $87 billion, up from $85-86 billion previously. UnitedHealth also raised earnings forecasts to a range of $3 to $3.15 per share. Prior guidance for earnings was $2.90 to $3.15 per share. Unitedhealth continues to execute, but investors remain on the sidelines.
Similar to Humana which we featured several weeks ago, Unitedhealth is very cheap on a valution basis. The stock trades for 9 times earnings, 0.4 times sales, and 1.5 times book value of $18.70 a share. A month ago, Credit Suisse upgraded the stock to Outperform and raises their target to $33 from $27 based on a more benign view toward healthcare reform as well as improving fundamentals. Firm says recent events in Washington reinforce their view that healthcare reform will include a substantial expansion of the Medicaid program and the creation of an insurance exchange with either no public plan option or a fallback public plan option. Credit Suisse believes Unithhealth is best positioned to capitalize on the growth opportunities that will emerge through the reforms. The stock provides by a 3 cent dividend so its' not for income investors. But with the stock trading for less than 10 times earnings, Unitedhealth has a long term attractive valution.