At a New High, Should You Be Buying UnitedHealth Group?


Shares of UnitedHealth Group (NYS: UNH) hit a 52-week high on Friday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
Health-care-benefits provider UnitedHealth Group is another stock that has moved to a new 52-week high despite having just as many pitfalls as reasons to be praised.

Shareholders who have held on to UnitedHealth recently have enjoyed strong earnings results that saw the company increase its EPS, cash flow, and revenue estimates for fiscal 2012. Enrollments levels are up, costs are under control, and the company is actively returning money back to shareholders by purchasing its own stock and raising its dividend by a quite noticeable 31%. Like most health-care providers, UnitedHealth is benefiting from an aging population and the increased need for medical care and coverage.

But just as we can praise UnitedHealth for a great earnings report, we can also look to the future and bite our nails in worry. Health-care costs are rising dramatically and are on pace, according to Bloomberg, to total 20% of U.S. GDP by 2021. These costs will assuredly outpace growth in the coming years, which is a major concern for health-care plan providers. In recent weeks Molina Healthcare (NYS: MOH) , which caters to lower-income families, was forced to withdraw guidance due to rising expenses in its Texas operations, while Centene (NYS: CNC) slashed its guidance due to rising costs in both Texas and Kentucky.

The prospect of increased government regulation adds another uncertainy for what are generally boring, but strongly cash-flow-positive businesses.

How it stacks up
Let's see how UnitedHealth Group compares to its peers.

UNH Chart
UNH Chart

UNH data by YCharts.

No real advantages or disadvantages here. Let's dive further into the metrics for each health-care provider.



Price/Cash Flow

Forward P/E

Net Margin (TTM)

UnitedHealth Group





WellPoint (NYS: WLP)





Humana (NYS: HUM)





Molina Healthcare





Source: Morningstar. TTM= trailing 12 months.

The differences between these companies are subtle, but there are definitely good and bad aspects to each one.

UnitedHealth is the most expensive of the group based on book value, but its net margin is the highest of the group. This means it's getting the most out of its underwritten policies, which is really what being a health insurer is all about. It also doesn't hurt that the company's dividend is now more in line with sector peer WellPoint.

As a comparison, Molina Healthcare's group-low net margin rate of 0.4% is indicative of its focus on the low-income segment of the health benefits market. Molina relies on Medicaid to boost its bottom line since many of its members rely on government health-care assistance. With costs rising and the government cutting back on expenses wherever it can, Molina's shareholders have a right to be concerned.

WellPoint is actually my favorite of this grouping as it offers the lowest price-to-book and P/E ratio. It isn't quite able to keep up with UnitedHealth in terms of net margin, but I feel it offers slightly better growth prospects than UnitedHealth. With its net margin near decade lows, I see plenty of room for improvement.

Humana is the middle-of-the-road choice of this group. It's attractive in that its cash flow growth has been impressive, and although its latest quarter was affected by higher benefit costs, the company nonetheless raised guidance for the year.

What's next
Now for the $64,000 question: What's next for UnitedHealth Group? The answer is largely going to depend on what happens with health-care reform and the upcoming election, and whether UnitedHealth can figure out a way to grow membership figures at a faster clip than costs are rising.

Our very own CAPS community gives the company a highly coveted five-star rating, with a whopping 95.5% of members who've rated it expecting it to outperform. I haven't personally joined the 3,400-plus members in making a CAPScall on UnitedHealth Group, as I'm undecided on the direction it'll head in the immediate future.

The overriding factor that will make or break health-care providers is whether current President Barack Obama retains office or loses it -- plain and simple. Health-care reform has the potential to bring in countless new members, but it also means an increase in plan costs and a possible cap on profits if regulations are put in place. In the meantime, government budget cuts are threatening to curb spending in the health-care sector as a whole, endangering what little momentum health-plan providers are able to garner. It's undeniably hard to argue against UnitedHealth's cash flow and history of growth, but I feel it'd be foolish to place your bets here before the Supreme Court decision and the presidential election. I'll revisit the company in six months.

UnitedHealth Group and other health-care-plan providers may not be your first choice as an investment, but they're clearly helping to change lives by making health care affordable. If you'd like the inside scoop on a stock our Motley Fool Rule Breakers team feels could offer the next revolutionary product, then click here for your free access to our latest report.

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At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of WellPoint. Motley Fool newsletter services have recommended buying shares of UnitedHealth Group and WellPoint, as well as creating a diagonal call position in UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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