UnitedHealth Group Inc. (UNH, Financial) is probably one of the best-performing health insurance companies in the U.S. The company provides health insurance services through fee-based plans at individual, employer and government sponsorship levels. Its other services include patient management, clinical services and administration services.
Management recently reported solid third-quarter results with Premium revenues increasing 12.8% from the prior-year quarter. The general level of optimism surrounding the stock is high and it is expected to continue its growth trajectory.
The chart above gives an apt depiction of the growth story associated with UnitedHealth. Over the past the years, the company has consistently delivered higher revenues as well as earnings. An appreciation of about 133% over three years is phenomenal and also justifies the 5-star business predictability rank the company holds on GuruFocus.Â
Focus on optimizing costs and increasing efficiency
UnitedHealth is also increasing its focus on the use of technology and data analytics in order to improve product design and customer service, which was spurred by the introduction of new products and the acquisitions of Genoa and Avella. Excellent cost management has also led to margin expansion, which contributed to earnings per share growth.
One of the management team's strategic initiatives that is worth highlighting is the digital platform known as Rally, which has more than 20 million users. It helps people manage their health by analyzing data and recommending appropriate health care providers, scheduling appointments, managing costs and more. This appears to be an excellent initiative to increase engagement, solidify the customer base and improve growth in a highly competitive health insurance industry.
UnitedHealth’s financial strength is unquestionable
The efforts of the management team toward increasing organizational efficiency are clearly visible in the company's bottom line. UnitedHealth has an operating margin of 7.65% and a net margin of 5.71%, which have not only improved but also outperform peers. The three-year earnings before interest, taxes, depreciation and amortization growth is as high as 14.1% and with respect to the top-line, the company has grown at a rate of 15.6% over the past three years. The company also has a return on invested capital of 21.78% and a return on equity of 26.29%. It is evident management has created excellent shareholder value over the years.
Regardless, it is important to analyze the current situation to assess whether the stock is a good buy or not. The company is currently trading with a price-earnings ratio of 20.64 and an EV-to-EBITDA multiple of 14.57, which appears to be reasonable and fair when we compare it to other global health insurance players. The EV-to-revenue ratio of 1.27 re-emphasizes the point that the stock is neither undervalued nor overvalued. Given the growth trajectory, however, it is highly likely that the stock will show good appreciation even without any multiple expansion. The company also has a decent dividend payout ratio and, overall, the stock appears to be an interesting pick for the long term.
Conclusion
There are a number of reasons for investors to favor a stock like UnitedHealth in the current investment climate – its revenue growth track record, a highly proactive management team carrying out relevant strategic acquisitions, solid financial fundamentals and a fair valuation. There is no doubt the health insurance industry is fairly crowded and that UnitedHealth has its fair share of competition. However, a good management team focusing on customer satisfaction and engaging in smart strategic initiatives like Rally is a good sign. The stock certainly appears to be a good bet over the long term.
Disclosure: No positions.Â
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