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Bull/Bear Report - What's the Prognosis on UnitedHealth Group, Inc. (UNH)
People often ask me why I call myself The Rational Investor. The short answer is that I believe markets are inherently inefficient and therefore Rational Investors can exploit those inefficiencies for long term gains.
Theoretically, the market is supposed to be a forward looking instrument that discounts future cash flows digesting all publicly known information about a company thereby determining valuation.
That theory may sound nice and tidy, but the reality is far less certain. Frankly, there are simply too many events that are simply unpredictable.
For this week's Bull/Bear column we'll put this little theory to test by examining UnitedHealth Group, Inc. (UNH).
This health care industry service provider enjoyed a multiple year run of success that was sidetracked by an options backdating scandal. More recently the company missed Wall Street expectations by a wide margin.
Such a state has resulted in a stock that is clearly wounded. Are the damages temporary or more permanent? That is the question I posed to the InvestorPlaceBlogs community and the answers were interesting indeed.
Our bloggers were split on this company. Read on to get the bull and bear opinions on whether or not you should buy UnitedHealth Group stock.
The biggest issue facing the company it would seem is the regulatory environment and how changes in Washington may or may not impact the company and its operations.
The fear of a Democrat landslide riding a wave of interest in universal health care could be problematic for UNH.
That brings us back to efficient market theory. In my mind, there should be absolutely no surprise at all about the forthcoming changes in health care. The market has a high degree of probability of a future event and appropriately discounts that event when determining valuation.
Or does it?
I think the answer in this case is fairly clear. UNH is trading at a very low valuation as compared to its historical trend. Some may say this is due to the poor performance of the first quarter, but part of the discount is surely related to the potential changes that may be forthcoming.
I state this as the operating performance would appear to be something that is fixable and short term at worst. UNH has delivered strong double digit earnings growth historically and I believe it can do so again.
The Rational conclusion for me is that much of the discount is related to regulatory uncertainty. In other words the market is already pricing in changes that may be coming.
Typically, worries over government intervention tend to get overblown. That may be the case here with UNH. If so, UNH appears to be worth the speculation at current levels. I think the odds are in favor of the longs.
What do our bloggers think?
The Bull Case - goodwill hunter
Prognosis-physical 11yrs double digit earning's growth. Growth by acquisition model positive. Positive stock buy back program. Now the bad news. The quote that comes to mind when I look at UnitedHealth is from Sigmund Freud- All human society is constructed on a complicity in a great crime. When you look at their record it's full of corruption from option back dating to the Ingenix database. IMHO this data base should be run independent third party. In game theory you got two hawks (doctors and insurers) fighting to pass the buck on to one dove. There is profit in confusion. I would buy UNH at this low. With a price target of 3-5 yrs 80-105. United is physically well, but mentally ill.
The Bear Case - Don Barrett
UnitedHealth Group is involved in what I would consider one of the more complex industries in the country and what has to be one of the more essential products we all need-health insurance. With the ballooning costs of health care services, government regulation and a moral duty to decide if a procedure or treatment is necessary and bottom line to the health insurers-is it worth the cost. As an example of this dilemma, I saw a premature baby born with a host of medical problems. Recently and in a short time the $1 million dollar cap on the insurance policy had been exhausted and the child was still in the hospital. So, the parents can't pay and the insurance policy limit is tapped out and won't pay anymore and the child is still sick and in the hospital. What now?
This is going to be the problem if and when we have a national health care program. When do you make the decision to stop the care for an individual and in effect pull the plug. The government now has almost no limit on what they will spend on each individual person. Is someone in a coma for years worthy of the cost to keep them alive when there is no hope they will ever come out of the coma. Is a premature baby worth millions of dollars in treatment when they may pass on anyway. Does anyone want some fat cat deciding whether their child is worth the cost that may be incurred. It's just a bad situation.
A national health care program will be a disaster in my opinion. The Medicare and Medicaid programs have to be one of the most abused programs the government ever came up with. I know in Kentucky where I live almost daily some doctor is charged with over billing the government. Our LT. Governor was charged a few years back, while in office, for over billing Medicare.
I have drifted from my original intention here. Is UNH a good investment? With all the above points I wouldn't recommend any of the health care insurers at this time. If Obama wins the election, what happens to these companies? Obama will push for a national health care program, if elected, and it looks to me like these private insurers will be history. Then we will have that fat cat I mentioned up in Washington deciding if that surgery or treatment is needed or moral. Morality seems to be in short supply in Washington and I can't think of anyone up in Washington I want making decisions on my health care.
While there is much to fear with respect to regulation, the market has already priced in such changes in my opinion. I think UNH merits consideration at current levels.
Jamie Dlugosch
Executive Editor, InvestorPlaceBlogs.com
Related Links for UnitedHealth Group:
Skeptical Capitalist Vad Yazvinski - Q&A Healthcare and the US Economy
Sector Intelligence: Insurance
Sector Intelligence: Healthcare Equipment and Services
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