Chapter five of A Fistful Of Valuations In The Style Of Warren Buffett & Charlie Munger by Bud Labitan

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### A Fistful Of Valuations - Chapter 5

An estimated valuation of UnitedHealth Group Inc., UNH was first performed on 5/6/2010.

UnitedHealth Group Incorporated (UnitedHealth Group) is a diversified health and well-being company. The Company operates in four business segments: Health Benefits, which includes UnitedHealthcare, Ovations and AmeriChoice; OptumHealth; Ingenix and Prescription Solutions. On June 1, 2009, the Company completed the acquisition of AIM Healthcare Services, Inc. (AIM). In March 2010, the Company acquired QualityMetric Incorporated.

Last Price 29.49 52 Week High 36.07 52 Week Low 22.80

Does UnitedHealth Group make for an intelligent investment or intelligent speculation in 2010? The 2015 discussion starts at the end of this chapter.

Let’s do a rough estimation of intrinsic value per share for 2010. Starting with a base estimate of annual Free Cash Flow at a value of approximately \$4,800,000,000 and the number of shares outstanding at 1,153,000,000 shares (In 2015, the current number of shares outstanding is 952,000,000.); I used an assumed FCF annual growth of 7 percent for the first 10 years and assume zero growth from years 11 to 15. Review the Free Cash Flow record here, and think about its sustainability:

http://financials.morningstar.com/cashflow/cf.html?t=UNH®ion=USA&culture=en-us

The resulting estimated intrinsic value per share (discounted back to the present) is approximately \$61.97.

Market Price = \$29.49 Intrinsic Value = \$61.97 (estimated) Keep in mind, and compare that Coca Cola’s Debt/Equity ratio is .47 or 47 percent; the Debt/Equity ratio here = .47 Price To Value (P/V) ratio = .45 and the estimated bargain = 52 percent.

More importantly, before we make a purchase decision, we must decide ( filter #1 ) if UNH is a high quality business with good economics. Does UNH have ( filter #2 ) enduring competitive advantages, and does UNH have ( filter #3 ) honest and able management. The current price/earnings ratio = 9.5 It ‘s current return on capital = 10.55

Using a debt to equity ratio of .47, UnitedHealth Group shows a 5-year average return on equity = 19.3

The biggest threat to profitability is: Competition and Government regulations that impose additional costs. The main competitors are: WellPoint Health Networks (WLP), Aetna (AET), Health Care Service Corporation, Humana (HUM), CIGNA Corporation (CI), Kaiser Permanente, Highmark, Inc., Blue Cross Blue Shield of Michigan, HIP Health Plan of New York, Centers for Medicare & Medicaid Services Private, Blue Cross and Blue Shield Association Private, UK National Health Service Private, Medco Health Solutions, Inc. Private, Caremark Pharmacy Services Private.

The Main Competitive Advantage currently is: The company generates 90% of its revenues through three health insurance organizations: one for private clients, one for Medicare recipients, and one for Medicaid beneficiaries. The government-sponsored clients represent an important source of business for UNH, so government can significantly impact United's profitability.

Further discussions on competitive pressures can be viewed here: http://www.wikinvest.com/stock/UNH

You the reader can insert your notes about management here: United has a number of other products and services. Ingenix is a data gathering and analysis division. United uses the data to evaluate the effectiveness of its doctors and hospitals. UNH sells this information to other health industry professionals.

Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.

Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of longterm market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.

Does UnitedHealth Group make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?

Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised. In terms of Opportunity Cost, is UNH the best place to invest our money today? Or, are there better alternatives? How will UnitedHealth Group compete going forward? Technologies change and new technology can emerge. Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.

On Apr 27, 2010, BUSINESS WIRE reported that the UnitedHealthcare company has been selected to administer Colorado state's self-funded health insurance plans, which are offered to about 32,000 Colorado state employees and their families. The five-year contract is effective July 1, 2010.

In summary, using a debt to equity ratio of .47, UnitedHealth Group shows a 5-year average return on equity = 19.3 . Based on a holding and compounding period of 10 years, and a purchase price bargain of 52.4 percent, and a relative FCF growth of 7 percent, then the estimated effective annual yield on this investment may be greater than 14.6%. Going forward, are there any transformational catalysts or condition indicators imaginable on the horizon? Technologies change and new technologies will appear on the scene. Would brand loyalty keep customers buying here?

Now, let’s discuss UnitedHealth Group Incorporated, UNH, results over the past five year period. As a business, the Net Profit Margin of UnitedHealth Group was in the range of 4.92% in 2010. In 2015, the Net Profit Margin is 4.42% TTM. This indicates that UnitedHealth Group as a business has narrow profit margins. Is this because of growth motivated capital spending, higher costs, or higher debt levels?

UnitedHealth Group’s Debt to Equity Ratio (Quarterly) was 0.95 for Sept. 30, 2015. This helped to produce a Return On Equity in the range of 18.75% in 2010. In 2015, the Return On Equity is 18.52%. This indicates that UnitedHealth as a business.

Its latest annual report of 2014, UnitedHealth Group management claims there are more than 9 million individuals eligible for both Medicare and Medicaid. This group has historically been referred to as dually eligible or MMP. These beneficiaries typically have complex conditions with costs of care that are far higher than typical Medicare or Medicaid beneficiaries.

While these individuals’ health needs are more complex and more costly, they have been historically served in unmanaged environments. This market provides UnitedHealthcare an opportunity to integrate Medicare and Medicaid funding