UnitedHealth Group (UNH, Financial) (6.8% of Sequoia’s capital at year-end, +7% total stock return in 2022)
United was among Sequoia’s best performing stocks this year, thanks to typically strong financial results and increased appreciation for the business’ relative insensitivity to the broader economy. For the full year 2022, United’s revenues and EPS are expected to be up approximately 13% and 17%, respectively. Versus 2019, the company’s revenues and EPS are expected to have compounded at annual rates of approximately 10% and 14%, respectively.
UnitedHealth Group may not be a particularly beloved company, but it is one of the more entrenched businesses we’ve come across. Managed care, in its various forms – commercial risk, commercial fee, Medicare Advantage, and managed Medicaid – is an utterly essential component of our healthcare system. And in managed care, no one is bigger, more diversified or better run than United. In addition to its managed care business, United owns and operates the country’s third largest pharmacy benefit manger and is also the single largest owner by a wide margin of non-hospital care assets, including physician practices, urgent care centers, and ambulatory surgical centers.
While we are highly confident in the quality of United’s business, we also recognize the importance of context. United has a very strong position within a healthcare system that is highly imperfect. Practically speaking, this means we need to balance the quality of the business against inherent policy risk, which ebbs and flows but is always present.
While we can easily imagine scenarios in which policy developments negatively impact United’s business, we consider it highly unlikely that United and the other managed care companies would ever get fully disintermediated. In fact, there is a reasonable argument to be made that United and the other managed care companies, which have been aggressively expanding into capitated business lines, are increasingly part of the solution to the problem of rising healthcare costs. Ultimately, we made the decision to trim Sequoia’s investment in United this past year after the stock appreciated significantly. Policy risk, while bearable, is real. And the risk-reward, though still attractive, had become less asymmetric since our initial investment in 2019.
At the current share price, United trades for approximately 19x expected EPS for 2023. We consider this an attractive valuation for a business that is highly entrenched, nicely diversified, very well run, and capable of growing earnings in economically insensitive fashion and at a teens rate for many years to come.
From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund fourth-quarter 2022 letter.
