Is UnitedHealth Suddenly a Dangerous Investment?

With shares of UnitedHealth Group Incorporated (NYSE:UNH) trading at around $56.73, is UNH an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

This is a good stock. This is a bad stock. This is a good stock. This is a bad stock. It sounds simplistic and absurd, but that’s the best way to describe how investors have been thinking about UnitedHealth over the past year. Increases in the stock prices have been met with doubt, and decreases in the stock price have been met with potential opportunity. All of this confusion is justifiable considering the current industry environment. Ever since Obamacare became a reality, the stock hasn’t acted the same as it had in the past. There is too much confusion going forward, and investors hate confusion.

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It’s yet to be determined how many new rules will affect UnitedHealth. These new rules include, but are not limited to, a ban on denial of coverage if there is a pre-existing ailment, dependent coverage up to age 26, annual rate review, and setting up security exchanges. We won’t have a clear picture on the effects of these new rules until 2014, which is why UnitedHealth is such a difficult situation to read. The end result is likely to be lower profit margins.

Current challenges for UnitedHealth include more consumers looking for bargains, increased competition, and a shaky global economy. However, it’s not all bad news for UnitedHealth. Medicare may raise payments, UnitedHealth recently won four contracts under a $3.6 billion Arizona Medicaid program, and fundamentals are strong.

The chart below compares fundamentals for UnitedHealth, Aetna Inc. (NYSE:AET), and WellPoint Inc. (NYSE:WLP). These three companies differ in size. UnitedHealth has a market cap of $57.29 billion, Aetna has a market cap of $16.58 billion, and WellPoint has a market cap of $19.80 billion.

UNH

AET

WLP

Trailing   P/E

10.70

10.51

7.96

Forward   P/E

9.47

8.73

7.99

Profit   Margin

5.00%

4.53%

4.30%

ROE

17.94%

16.15%

11.28%

Operating   Cash Flow

 $7.16 Billion

$1.82 Billion

$2.74 Billion

Dividend   Yield

1.60%

1.60%

2.30%

Short   Position

1.30%

6.00%

1.90%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

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