UnitedHealthGroup: A Foolish Buy!
Kiran is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
UnitedHealth (NYSE: UNH) is one of the largest diversified healthcare companies in the world and the largest in the United States if not the entire North American continent. The company has a diversified set of product lines with the ultimate objective of providing affordable healthcare to millions.
Last year was a successful one for UnitedHealth. In spite of finding itself surrounded by a tumultuous economic environment, the company recorded revenue of $111 billion, up 9% year-over-year from $102 billion during 2011. Additionally, the company added nearly 8 million new customers in the year, with Brazil accounting for 6 million. The remaining 2 million were added in through the US market.
UnitedHealth has been a firm believer in challenging the status quo, and with this approach constantly moves on the path of innovation. The company’s recent innovations include a mobile app, which enables its millions of customers 24/7 access to registered nurses, nearby network physicians, hospitals and other medical facilities.
The "Optum Care Suite" and "My Healthcare" cost estimator are some other key innovations that the company developed in recent times. Going forward, I believe it will add substantial value for the customers and create solid goodwill.
It must be noted that fiscal 2012 was an extremely good year for the healthcare major. Not only did the company make financial gains, it was added to the prestigious Dow Jones industrial average, the benchmark index of NYSE, owing to the company’s consistent earnings and generous trade volumes.
The company received several accolades owing to its corporate and core financial performance and several social contributions. UnitedHealth was added to the Dow Jones sustainability world index and was voted one of the most admired company in the insurance and managed healthcare sector in the 2012 Fortune rankings. It earned a single A (stable outlook) corporate debt rating upgrade by global ratings firm Standard and Poor's. Furthermore, it ended 2012 in 22nd place in the global Fortune 500 rankings, further exemplifying its market standing.
The company seems primed for success with over 100,000 employees in the U.S, which serve over 84 million customers worldwide, coupled with a network of over 780,000 physicians and care professionals the cover the entire American population. These strong fundamentals make the company a formidable player in the healthcare market.
UnitedHealth further proves its fundamental financial strength, as it posted robust performance during the first quarter of 2013. Revenue exceeded $30 billion, which is an 11% year-over-year increase. Optum generated reported revenue growth of 15% and an operating earnings growth of 96%. The company managed to add over 1 million users to its customer base, resulting in great quarter for UnitedHealth .
A deeper analysis of the financials reveals strong potential for future growth in earnings and revenue. The company has a forward P/E of 11.1, down from the current P/E of 12.6, indicating growth in earnings.
Healthcare as a sector is highly competitive; UnitedHealth likewise has a bunch of healthy competitors to keep the company constantly on its toes.
UnitedHealth faces significant competition from Aetna (NYSE: AET) and Humana (NYSE: HUM), however these companies are relatively smaller compared to UnitedHealth, which gives the company the significant advantage through larger scale.
Aetna's "envisions" is slowly becoming the market leader in the diversified and large healthcare-services sector. It offers cost-effective healthcare solutions to millions. The company is entirely focused on providing innovative and tailored services to meet the needs of its customers and developing a diverse supplier base reflecting the multicultural environment.
Aetna believes the role of a commercial organization goes beyond just earning profits and community service plays an important part in its overall strategy. It is for this reason why the company was ranked fourth in the Civic 50 survey of most community-minded companies in 2012.
A look at the financials and the company doesn’t disappoint, as 2012 saw it record a 6% growth in revenue and net earnings close to $1.7 billion. The company looks focused on expense management, as its cost-cutting initiatives enabled it to reduce its operating expense ratio. Although these figures look meek compared to UnitedHealth, they still enable me to keep an optimistic view on the company.
The first quarter of fiscal 2013 saw the company move along similar lines, cutting expenses and bolstering its revenue. In the long term, the company looks poised to sustain its growth and profitability and become a significant player and a formidable threat to UnitedHealth.
Important market player
Humana is another company competing for market share in the healthcare services-solutions market, providing innovative and tailor-made solutions for its customers. The company primarily offers insurance products and health and wellness services.
Considering UnitedHealth Group's scale of operations, Humana may not be a significant competitor but is still an important player in the market.
2012 was a significant year for the company, as it achieved several milestones. The company made significant progress in the Medicare advantage star-quality ratings, representing the satisfaction level of the plan members on an overall basis. The study was based on combined analysis of various qualitative and quantitative data.
The first quarter of fiscal 2013 saw the company report strong performance, as revenue increased by 2% to $10.5 billion and the company recorded strong cash flow with cash equivalents of $11.4 billion, up $200 million from the previous quarter.
Going forward, the company plans to expand its Medicare Advantage business despite the proposed cuts, as this particular business division facilitated in propping up the insurer's revenue. Humana's CEO Bruce Broussard stated
[The] company will continue that upward trend, even in the face of continued cuts to Medicare Advantage, the most recent of which led to a downturn in Humana's stock.
The Medicare program has enabled the company in exponentially increasing its revenue in the past decade. The program added approximately $9 billion to its overall company value, and during 2012, revenue from the Medicare Advantage program stood at $16 billion, which is 64% of its overall revenue. I believe the persistent approach of the CEO will surely pay off for Humana's shareholders.
Foolish bottom line
Healthcare is one of the largest sectors, with healthcare spending in the U.S. making up for 18% of the GDP. An aging American population, together with major reforms in the healthcare sector -- courtesy Obamacare --make this sector incredibly challenging and valuable.
UnitedHealth's global presence and strong financial fundamentals give it a strong competitive edge, not just in the U.S. market but the international markets as well. This is a fact duly represented by the company’s recent quarterly and year-end revenue.
Moving forward, I believe the company looks poised for robust growth. It should be noted that private health insurance enrollments make the highest contribution to the overall revenue and hold the maximum value in UnitedHealth's stock price.
According to the projections offered by Trefis, total enrollments in the U.S. declined during 2011 predominantly due to rapidly escalating unemployment. However, Trefis forecasts a turnaround, and rapid growth should resume from 2014 onward owing to the patient protection and affordable care act. This should result in an exponential increase in enrollments in the future unless there is a major political intervention to alter the act.
I believe the future trends are more than sufficient to motivate investors to put their hard-earned money in UnitedHealth. For investors seeking to diversify their portfolio through investing in the healthcare sector, UnitedHealth is certainly a buy.
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Kiran Gulati has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!