UnitedHealth Investors: Buy, Sell or Hold?

UnitedHealth (NYSE:UNH) is the nation’s largest health insurance provider with an 11.7% share of the market. The company is less dependent on individual and small business health policies for revenue than many of its peers as UNH has a substantial information technology business as wells as a Medicare advantage and pharmacy benefits operation.

Considering the degree of uncertainty surrounding health care in this country, is UNH right now a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

In theory, the re-election of Barack Obama as president could act as a moderate catalyst for the share price as that would preserve the 30 million new customers for health insurance payers as a result of the individual mandate. However, in practice, other provisions of the Affordable Health Care Act and general concerns about Obama’s economic policies could counter-balance the upward pressure.  The AHA requires insurers to issue premium refunds if their medical care ratios fall below 80%; with UNH standing at 80.2% as of Q3 2012.  The medical cost ratio is determined by dividing costs by premiums.

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Again in theory if Governor Romney wins, that could drive down the share price of health care insurers facing the loss of the individual mandate for carrying health insurance. In addition, Governor Romney has said he will keep the ban on pre-existing conditions, which only works for the providers if they get those 30 million new customers.  In practice, no one knows what Governor Romney will do and how much of the Affordable Health Care Act will go away and what might remain.

E = Equity to Debt Ratio is Close to Zero

UnitedHealth has a moderate debt to equity ratio of 0.43 and a total debt of $13 billion against total cash on hand of $11.9 billion that compares favorably with its major competitors. Humana (NYSE:HUM) leads the pack with a debt to equity ratio of 0.22 and $11.8 billion total cash on hand against total debt of $1.8 billion. Aetna (NYSE:AET) has a debt to equity ratio of 0.47 with $4.7 billion in total debt against $$3.3 billion total cash on hand.

T = Technicals on the Stock Chart are Strong

As of October 23rd 2012 the stock price is 0.26% below its 20 Day Simple Moving Average, or SMA; 2.91% above the 50 Day SMA; and 2.43% above the 200 Day SMA. The share price crossed above all three averages in mid-September and with the exception of the modest dip in the 20 day SMA has remained above the averages.  The Relative Strength Indicator, or RSI, breached the 80 overbought level in early September, dipped to 40 and then climbed back to 79 before its current downward move to 49.

S = Support is Provided by Institutional Investors & Company Insiders

UnitedHealth has one of the largest percentages of institutional holders of any Dow component at 87.95%.  This is somewhat impressive as UNH was added to the Dow on September 24th of 2012. The top five holders are Fidelity Investments, Wellington Management, Vanguard Group, Capital World Investors, and JP Morgan Chase. 

E = Earnings Are Increasing Quarter over Quarter

United’s release of Q3 earnings on October 16th were solid with a 28% quarter over quarter increase in earnings per share and an 8% increase in revenue.  The company’s major competitors have yet to report but if Q2 performance is any kind of guide, all trailed UNH by a wide margin. Only WellPoint (NYSE:WLP) had a positive quarter over quarter EPS increase of 2.69%.  Earnings per share at Aetna (NYSE:AET) dropped 4.62% and a troubling 20.35% at Humana (NYSE:HUM).

E = Excellent Relative Performance to Peers

Return on Equity is a favored measure of many investors and on this metric UNH handily bests its rivals with an ROE of 19.07% compared to 10.53% at WellPoint; 15.5% at Humana; and 17.71% at Aetna. Operating margins of 8.56% at UnitedHealth trail Aetna’s 8.85% but outperform WellPoint’s 6.31% and Humana’s 5.41%.

The share price performance is another story all together.  UNH beats them all with a 12.76% year to date increase in share price and a year over year increase of 19.66%.  In contrast, Aetna is up 5.18% year to date and both Humana and WellPoint have seen their share price drop.

T = Trends Support the Industry in which the Company Operates

With increasing life expectancies and the size of the baby boomer population entering the golden years, the trends for health care services are explosive.  How much that translates to the health care payers remains to be seen.  The important distinction to keep in mind is that UNH is not a health care provider; rather it is a health care payer.  Demand for services will definitely go up but regulatory pressures over cost are likely to increase as well.  Whether it be the Affordable Care Act or some other means of health care reform, premium increases cannot be sustained to infinity.  Something has to give and the profitability of health care payers going forward is at best uncertain, and at worst facing a decline.

Conclusion

After the election UNH may be a buy, but as of this writing the stock is a definite WAIT and SEE.  If President Obama wins and you believe the Affordable Care Act will be good for health care payers over the long term, a BUY may be in order.  If Governor Romney wins, STAY AWAY until the Affordable Care Act is repealed and the replacement is evaluated.

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