“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Benjamin Graham.
We wanted to escape from most of the serious investment loss, therefore we try to apply stringent standards of stock selection and reasonably frequent scrutiny. Our first and foremost goal is safety of principle.
Here is the summary of business analysis (more so just outlining the facts) of United Health Group (UNH).
Descriptive Function
Incorporated in 1977, UnitedHealth Group is a diversified health care company dedicated to helping people live healthier lives and helping make the health system work better for everyone. It is headquartered in Minnesota.
a. Qualitative Factors
1. Nature of the Business
The core competencies of United Health are data and health information; advanced technology; and clinical expertise. They operate through two business platforms: Health benefits operating under UnitedHealthcare and Health services operating under Optum.
UnitedHealthcare provides health care benefits to an array of customers and markets.
Optum is a health services business serving the broad health care marketplace, including payers, care providers, employers, governments, life sciences companies and consumers, through its OptumHealth, OptumInsight and OptumRx businesses.
In the United States, health care spending has grown consistently for many years and comprises 18% of gross domestic product (GDP).
After a moratorium in 2017, the industry-wide amount of the Health Insurance Industry Tax in 2018 was $14.3 billion, with UNH portion being $2.6 billion.
It is a highly regulated and competitive business.
There is no major legal issue right now.
2. Management
Mr. Hemsley is Executive Chair of the Board of UnitedHealth Group and has served in that capacity since September 2017. Mr. Hemsley previously served as Chief Executive Officer from 2006 to August 2017. Equity compensation play for Executive is $33 million. Below is the full list of the executive officers.
b. Quantitative Factors
Here is a quick highlights of United Health’s statistical exhibit.
1. Capitalization
On March 6th, 2019, United Health is selling for $226.5 billion. In the beginning of 2018, it was selling for $212 billion. In a year, the market price increased $14.5 billion while increasing the revenue and earning by $25.1 and $1.4 billion respectively.
| 2018 | 2017 | |
| Operating Margin | 7.64% | 7.55% |
| Net Margin | 5.26% | 5.22% |
| P/E | 19.03 | 20.19 |
2. Earnings and Dividends
Majority of UNH revenue comes from premiums paid by millions of customers. Their customers pay premium upfront and use the service later, which results in float. This float is then invested; And, this investment made $1.3 billion in 2018. See below for detail.
Yearly earnings are listed below. The increase in earning is due to sales growth, margin improvement and price increase. They are all favorable to the shareholders.
In June 2018, the Board of Directors increased the Company’s annual cash dividend rate to shareholders to $3.60 per share compared to $3.00 per share, At current price, dividend yield is 1.49% annually.
The increase in earnings is due to sales growth, margin improvement and price increase. They are all favorable to the shareholders.
During the fourth quarter of 2018, they repurchased 3.3 million shares at an average price of $256.15 per share.
3. Assets and Liabilities
Here is a quick snapshot of its Assets and Liabilities.
| (in billions – rounded) | 2018 | 2017 |
| Total Current Assets | 38.7 | 37.1 |
| Total Assets | 152.3 | 139.1 |
| Total Current Liability | 53.2 | 50.4 |
| Total Liability | 98 | 89.3 |
| Total Equity | 54.3 | 49.8 |
| CA/CL | 0.39 | 0.42 |
| TD/TE | 1.80 | 1.79 |
| TD/TA | 0.64 | 0.64 |
Its current liability is higher than its current assets. It has been that way. Its Accounts payable and accrued liabilities are due after its Accounts receivable are due.
4. Operating Statistics
The following represents a summary of select 2018 year-over-year operating comparisons to 2017.
- Consolidated revenues increased by 12%, UnitedHealthcare revenues increased 12% and Optum revenues grew 11%.
- UnitedHealthcare’s addition of 2.2 million people through acquisition and 250,000 through organic growth was offset by 2.9 million fewer people served as a result of completion of its commitment under the TRICARE military health care program.
- Earnings from operations increased by 14%, including increases of 7% at UnitedHealthcare and 23% at Optum.
- Diluted earnings per common share increased 14% to $12.19.
- Cash flows from operations were $15.7 billion, an increase of 16%.
Few top highlights of cash flow below:
- Common share repurchase of 4.5 B
- Cash dividends paid of 3.3 B
- Interest on Debt of 1.4 B
- Capital expenditure of 2.0 B
The Return on Earnings seems satisfying, however it is due to high leverage.
| 2018 | 2017 | |
| ROE | 21.92 | 21.08 |
| ROA | 7.81 | 7.55 |
By and large, United Health is a fabulous company. It operates in a growing and fairly stable industry. It’s customers, revenue and earnings are growing steadily with the expansion of the industry. In United States, healthcare is a major expense for an individual and it will be so for a long time.
As far as the current price is concerned, I believe it is a bit high. Matter of fact, it always sells at a premium. I have no clue of its intrinsic value. However, I am optimistic on its long term prospect. This optimism is only possible if the following bill do not pass (read the warning below).
Warning!
During this yearly review, I came across a very bad news for the Health Insurance Industry. Perhaps a good news for the US citizens. The United States National Health Care Act, or the Expanded and Improved Medicare for All Act bill was introduced in the US House of Representatives first in 2003 and every year since then. Now the bill has got a momentum and has a majority support in the lower house. Once approved and signed as a law, the act would establish a universal single-payer health care system in the United States. The rough equivalent of Canada’s Medicare. Under this system, the US government will pay for all the medical expense therefore there will be no need for a third party insurance company like United Health. Americans will pay for this service through a higher federal tax.
H.R.676 – Expanded & Improved Medicare For All Act (Congress.Org)
Disclaimer – No position.
Arrow of Performance 