UnitedHealth Group (UNH-$55)(UNH)
UnitedHealth is the nation's largest provider of managed-care services. The managed-care business has strong economies of scale, so UNH is also arguably the most efficient provider. In 2005, when UNH earned $2.48 per share, its stock reached a high of $65, for a P/E ratio of 26x. UNH is expected to earn just over $5 per share this year, more than double its earnings from seven years ago, yet the stock price is now lower. The result is that UNH sells at only 10x expected 2013 earnings. Managed-care companies have fallen to below-average multiples because investors fear that health care reform will hurt these businesses significantly. We believe that fear is misplaced. We think the government needs companies like UNH because using the existing managed-care networks is far less expensive than building a new one, and UNH's breadth should allow it to thrive in most scenarios. UNH revenues grow with medical costs, supplemented by market share gains and an aging population that requires more spending on health care. Further, the share base has fallen every year since 2005 as a result of management using excess cash generation for repurchases. Shares outstanding have been reduced by about 4% per year, a trend we expect will continue. We believe that purchasing UNH at a below-average P/E ratio, combined with its moderate revenue growth, its shrinking share base and its moderate dividend, is likely to produce an above-average rate of return.
From Oakmark Funds' third-quarter letter.