John Dorfman recently wrote an article in Bloomberg about four stocks that are reasonably priced. It seems from the article that Dorfman believes the overall market is over valued.
Dorfman mentioned some interesting names that a lot of people have not been talking about recently.
One stock he mentioned stuck out: United Health. In general the healthcare industry seems to be cheap. The vanguard healthcare ETF (XLV) trades at a p/e of 11 which is a lot lower than the market p/e of approximately 16.
Many people are scared of healthcare stocks because there are so many unknowns in the current healthcare proposal. Many investors are scared of drastic cuts to Medicare. However, I think the market is overreacting by pushing down all the healthcare stocks without discrimination.
While 69% of Humana’s revenues come from Medicare, only 20% of United Healthcare’s revenues come from the program. Yet UNH is only trading at a P/E of 9.42, 6.6x operating cash flow, 7.7x free cash flow and Enterprise Value/EBITDA of 4.90.
So why is the market giving UNH such a low valuation?
Many investors are still frightened that the new healthcare bill will affect the stock price. I do not think this is a serious concern as I mentioned above.
In addition there is a serious lawsuit pending against the Government. According to Bloomberg News:
UnitedHealth’s PacifiCare Life and Health Insurance unit has committed almost 1 million violations. If the company is found guilty of each violation and fined the maximum amount, it could face penalties of as much as $9.9 billion.
Dorfman is not concerned by these possibilities. He states:
The allegations include failing to tell health providers they could appeal denied claims, wrongfully denying claims, taking too long to acknowledge claims, paying incorrect amounts and taking too much time to process claim appeals.
I don’t believe that these accusations are a fair representation of the business practices of UnitedHealth Group as a whole. And I’m confident that any fine the company ends up paying will be a lot less than $9.9 billion.
I might add that a company as strong as UnitedHealth could whether such a large sum as seen in the case of BP. BP to date has well over $20 billion in legal costs, and many more billions to come. Yet despite the massive mess BP seems to be in decent shape.
One possible catalyst in this case could the company’s ability to maintain its Medical Loss Ratios below Health Care Reform’s MLR floor which would give it more maneuvering room. And it goes without saying that if the healthcare bill’s impact on UNH becomes clearer, and the lawsuit is won the stock could appreciate a lot.
Disclosure: I am Long BP and XLV, no position in UNH