UnitedHealth Is Just What the Doctor Ordered for Defensive Investors

NEW YORK (TheStreet) -- Benjamin Graham taught that intelligent investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. By using our ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries.

Here is our specific look at how UnitedHealth Group (UNH) fares in our valuation model.

UNH Chart

UNH data by YCharts

In our view, there are two types of investors: defensive (more conservative, less able to conduct research) and enterprising (more willing to take risk and conduct research). Any stock suitable for a defensive investor is also appropriate for an enterprising investor. Let's look at how the stock fares for each type of investor.

Defensive Investor -- must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise -- market capitalization of at least $2 billion -- PASS
  2. Sufficiently Strong Financial Condition -- current ratio greater than 2 -- FAIL
  3. Earnings Stability -- positive earnings per share for at least 10 straight years -- PASS
  4. Dividend Record -- has paid a dividend for at least 10 straight years -- PASS
  5. Earnings Growth -- earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -- PASS
  6. Moderate PEmg ratio -- PEmg is less than 20 -- PASS
  7. Moderate Price to Assets -- PB ratio is less than 2.5 or PB x PEmg is less than 50 -- PASS

Enterprising Investor -- must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 -- current ratio greater than 1.5 -- FAIL
  2. Sufficiently Strong Financial Condition, Part 2 -- Debt to Net Current Assets ratio less than 1.1 -- FAIL
  3. Earnings Stability -- positive earnings per share for at least 5 years -- PASS
  4. Dividend Record -- currently pays a dividend -- PASS
  5. Earnings growth -- EPSmg greater than 5 years ago -- PASS

Next let's consider the stock's valuation.

Valuation Summary

Key Data:

Recent Price $77.17
MG Value $132.16
MG Opinion Undervalued
Value Based on 3% Growth $75.98
Value Based on 0% Growth $44.54
Market Implied Growth Rate 3.11%
NCAV -$30.19
PEmg 14.73
Current Ratio 0.73
PB Ratio 2.33

Balance Sheet -- 3/31/2014

Current Assets $22,364,000,000
Current Liabilities $30,716,000,000
Total Debt $14,524,000,000
Total Assets $84,622,000,000
Intangible Assets $36,017,000,000
Total Liabilities $52,073,000,000
Outstanding Shares 984,000,000

Earnings Per Share

2014 (estimate) $5.44
2013 $5.50
2012 $5.28
2011 $4.73
2010 $4.10
2009 $3.24
2008 $2.40
2007 $3.42
2006 $2.97
2005 $2.48
2004 $1.97

Earnings Per Share -- ModernGraham

2014 (estimate) $5.24
2013 $4.95
2012 $4.43
2011 $3.87
2010 $3.36
2009 $2.97

Dividend History

UNH Dividend Chart

UNH Dividend data by YCharts

Conclusion:

UnitedHealth Group is suitable for both defensive investors and enterprising investors. The company passes all of the defensive investor's requirements except the current ratio, and although the enterprising investor should be a bit concerned with the high level of debt relative to current assets, the company qualifies for both investor types. As a result, value investors should feel comfortable proceeding with further research into the company and its competitors.

From the valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.36 in 2010 to an estimated $5.24 in 2014. This level of demonstrated growth exceeds the market's implied estimate of 3.11% earnings growth and leads us to calculate an estimate of intrinsic value that is well above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company's prospects.  

What do you think? What value would you put on UnitedHealth? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It's a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

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At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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