Aug.
23, 2019 12:17 PM ET | Chris Lau
Summary
UnitedHealth shares
fell ~10% in the last month despite any bad news.
Growth prospects are
better than ever.
Company is lowering
medicare costs and helping its customers save money.
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Despite raising its
outlook on July 18, shares of UnitedHealth (UNH) fell to $232.94 recently. The stock
failed to break out above $250 throughout this month. Should investors ignore
the JPMorgan hospital survey that suggests a weak third-quarter ahead? Or might
investors trust that UnitedHealth meets its strong forecast in the upcoming
quarterly report?
In July,
JPMorgan conducted a hospital survey that
indicated persistently high medical services usage. This could increase the
medical loss ratios for companies like UnitedHealth, Anthem (ANTM), or Humana (HUM). This survey is running contrary to
UNH's 2019 guidance, which is higher than its previous outlook. It expects 2019
GAAP EPS as high as $14.15 and GAAP net income as high as $13.75 billion. And,
although this would value UNH stock at 16.5 times 2019 earnings, it deserves
the premium.
UnitedHealth reports
record profits year over year, helped by raising premiums in that time. EPS will
grow as steady as its revenue growth:
Source: Simplywall.st
The industry runs the
risk of the government clamping down on the rising premiums. Policyholders may
complain about the ever-increasing rates, pressuring the government to limit
price hikes. UNH argues that it helped consumers save money. On the conference call, it said that the strong value
of PBMs helped consumers save around $2,000 per year, per consumer.
UnitedHealth applies rebates at the point of sale for consumers and protects
them as best as possible on list price increases.
UNH shares (blue
line) fall in the last month:
Data by YCharts
Strong Performance Ahead
UnitedHealth's
guidance raise reflects management's overall confidence in the platform of the
business. At OptumHealth, its care platform, called OptumCare, is building a
value-based physician-led and patient-focused healthcare system. After
completing the acquisition of DaVita Medical Group for
$4 billion, UNH will integrate it with its value-based practices. It will find
synergies, cutting costs, and increasing operating efficiency. It forecasts
seeing some meaningful contributions from the platform next year in 2020.
Rising national
health expenditures are an ongoing concern, but UNH believes it is contributing
positively to lowering the nation's healthcare burden. As national healthcare
costs fall, UnitedHealth will continue to keep costs falling. It will achieve
that by driving efficiency in the way it uses the nation's healthcare
resources. And it will do so without hurting the patient experience. UNH has
the backend platform to increase engagement with people as it manages their
health conditions more proactively. Most importantly, it is giving its
physicians the work environment and support needed for them to deliver
high-quality outcomes for their patients. OptumCare and UnitedHealthcare give
the environment that complements the physician care.
Dividend Income
UnitedHealth's stock
will pay a $1.08 per share quarterly dividend for shareholders of record Sept. 16. At a dividend yield of 1.85%,
investors could use a Dividends: Stable Growth model to arrive
at a fair value of $256 for the stock (per
finbox.io). The 10 analysts who cover UnitedHealth are even more bullish. The
average price target is $303 (per TipRanks):
Only one analyst
rated UNH stock a "hold" in the last month, while everyone else
ranked the stock a "buy."
Your Takeaway
UnitedHealth has
plenty of upside revenue growth ahead and a stable dividend. Management
balanced the growth prospects against the risk-taking in OptumCare and
continues to expect growth there. It has businesses that serve federal
employees, military veterans, and financial institutions. The stock's monthly
rapid drop is unusual, but it also creates an opportunity. Investors who missed
the entry point at $220 in mid-April saw the stock climb to above $260 by July.
The stock market volatility in the last week may have pulled UNH shares lower.
At this level, investors should consider buying it here.
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Disclosure: I/we have no
positions in any stocks mentioned, but may initiate a long position in UNH over
the next 72 hours. I wrote this article myself, and it expresses my own
opinions. I am not receiving compensation for it (other than from Seeking
Alpha). I have no business relationship with any company whose stock is
mentioned in this article.
https://seekingalpha.com/article/4287597-buy-dip-unitedhealth
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