Investment Jungle

In my last post, I had discussed the fact that Phil Town recently mentioned 3 stocks to watch: Walgreen Co (WAG), United Health Group Inc (UNH) and Healthways Inc (HWAY).

Today, we will analyze United Health Group Inc.

Company Profile:

From ADVFN Financials

The Company design products, provide services and apply technologies that improve access to health and well-being services, simplify the health care experience, promote quality and make health care more affordable.

You can find a more detailed profile at Yahoo Finance.

This is a large cap stock with a market capitalization of $71.01B.

Financial Analysis:

Let’s have a look at the Big Five and see how the moat is doing.

First off, we start with the Return on Invested Capital (ROIC) to see how management has been doing. And from the looks of it, they have been doing a fine job. The 5 year ROIC is 17.70% and last year’s ROIC was 15.50%. In 2002 and 2003, management had great years with 25%+ ROIC. Unfortunately, the trend is going down but seems to have stabilized at the 15% range.

Return on equity (ROE) confirms the ROIC with a 10 year average of 19.87% and a 5 year average of 24.75%. Management has been doing a very good job.

Looking at the equity growth rate, the last 5 years have been absolutely amazing with a 5 year average of 40.18%. However, the years before those were pathetic with no year having a growth rate over 9%. Of course, the 10 year average still comes out decent at 23.08% thanks to the last 5 years.

The earnings per share growth rate has been wonderful over the whole 10 years. The 9 year compounded growth rate is a whopping 33.13%! Once again, from 2002 and onwards, the earnings per share growth rate has been decreasing consistently.

Sales growth rate has been solid. The 9 year average is 17.90%, the 5 year is 24.31%, the 3 year is 33.98% and last year was 57.70%! Nice trend line on the sales growth!

And management has been able to grow cash flows consistently over the 10 years at a 29.57% clip! Very impressive.

The Big Five look pretty solid. Let’s find the sticker price.

Stock Analysis:

Determining the forward P/E was rather simple. The 10 year average is 19.75, the 5 year average is 18.84 and the current P/E is 17.21. All historical P/E values line up nicely and UNH is currently at its lowest P/E. So I will use the 17.21 P/E going forward.

Coming up with the future EPS growth rate was a little harder. Looking at the equity growth rate, the first 5 years and last 5 years are almost mirror images! The 5 year average was an amazing 40.18%. The 10 year average tempers that number down to a more reasonable 23.08% and last year’s equity growth rate was 18.49%. Being a conservative investor, I normally take the lowest of the averages. But this time I will take last year’s low growth rate of 18.49%.

Looking to the analysts for assistance, I see that they have projected 17% future EPS growth rate. That is pretty close to my 18.49%. So I am happy with my estimate, but I will go ahead and use their more conservative estimate.

That brings me to a sticker price of $63.20. At close of Monday, the current price was $53.19. That is a discount of 15.84% to the sticker price. That is a pretty healthy discount. But it is not close to the MOS price of $31.60. That is still a premium of 68.32%.

Check out my calculations here.

Warren Buffett’s Yield Comparison:

Comparing the earnings yield of UNH to the 10 year US bond, I see that the earnings yield is 5.81% as compared to the 10 year bond at 5.11%.  Warren Buffett has said that if you can’t find an earnings yield higher than the 10 year bond, stick with the bond.  Well, in this case, UNH has the bond beat.  So another plus in UNH’s favour.

Conclusion:

I would agree with Phil Town that this is a wonderful business. And it is selling at a semi-attractive price with the 15.84% discount to the sticker price. But like my Walgreen Company analysis, Phil’s pick is not close to the MOS price.

Another stock to add to my watch list.

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