On pages 153 to 154 of 3-4 of my book “The Rules of 10 Baggers“, I used this company to illustrate the health care industry in the US stock market.
Indtroduction
Company profile
UnitedHealth (ticker: UNH) was founded in 1974 as Charter Med Incorporated, headquartered in Minnesota, and reorganized a few years later as United HealthCare Corporation, which eventually formed its current structure and name.
UnitedHealth Insurance has achieved today’s status and scale mainly through continuous mergers and acquisitions of competitors over the years. The most important of these is the purchase of MetraHealth for $1.65 billion in cash equivalent to stock in 1995, making it the largest health care management company in the United States.
Business profile
UnitedHealth Group has more than 130 million customers. It has two main business units:
- UnitedHealthcare, commonly known as the health care division; insurance fare prepaid by customers for various levels or plans of health insurance with varying disease coverage. It accounts for about 80% of the company’s revenue.
- Optum, an expansion unit established by the company through mergers and acquisitions in recent years, accounts for about 20% of the company’s revenue. It also includes three subgroups:
- OptumRx, which operates mail order pharmacies.
- OptumHealth, which operates health savings accounts.
- OptumInsight, a platform for payment processing related to operating healthcare businesses.
US does not have health care program for all citizen
The US is a capitalist country with “basically” no state-owned enterprises and no health care program for all citizen. Therefore, the people need to take care of their own life, senior people, sickness and death, and the state will not take care of you. Health care is the most concerned thing for the American people besides food, clothing, housing, and transportation. When looking for a job, in addition to the salary, they also care about the health care plans that employers can provide. There is basically no plan in the United States that pays a fixed fee and covers all health care contents like Taiwan, and even if there is, the general public cannot afford it at all.
The medical-related industries in the United States account for about 18-20% of the US GDP, which is larger than you and I imagine. As a result, a number of related medical enterprises have been created, and health care companies are an important part of them. However, the medical and health care laws in the United States are very complex and impossible for average people to understand. As a result, a few large health care companies have a substantial oligopoly of the market.
This incident also caused criticism from Buffett, who vowed to set up a joint venture, a nonprofit called Haven, with Amazon (ticker: AMZN) and JPMorgan Chase (ticker: JPM) with great fanfare, wanting to reform the health care. But the final result was that the joint venture closed. You can imagine how complicate the field are and how difficult it is for outsiders to get involved.
Performance and Valuation
Business performance
| Year 2021 | UnitedHealth |
| Annual revenue and growth rate (million) | 287,597 +11.84% |
| Annual operating income and growth rate (million) | 23,970 +6.985% |
| Annual net income and growth rate (million) | 17,285 +12.22% |
| Operating margin | 8.33% |
| Net margin | 6.01% |
Stock valuation
| 6/29/2022 | UnitedHealth |
| Market capitalization ($ billion) | 477 |
| Share price | 508.44 |
| P/E | 27.83 |
| Dividend yield | 1.3% |
| Stock performance in past 5 years (S&P 500 was＋65.13%) | +174.21% |
Stock performance
In this year bear market, as of 10/14/2022, UnitedHealthcare is one of the few large-cap stocks with positive U.S. stock price returns so far this year. UnitedHealth Insurance has risen 3,664 times since its listing! And everyone is more often discussed, and Microsoft (ticker: MSFT), which is used as an example, is only 2,224 times.
Pros and Cons of Investing in UnitedHealth Insurance
Pros
UnitedHealthcare is the largest healthcare group in the world, and healthcare is a prepaid industry. Customers must sign up first, so it is a highly predictable company with stable cash flow. It’s also a favorite type of investing in public companies.
Please note that health care is basically the insurance industry, just a very special field of insurance. The benefits of both the insurance industry and the medical industry are available at the same time!
And health care takes care about everyone’s life and health, and no one can and cannot bargain for medical expenses. Basically, it has nothing to do with the economic boom, because major diseases will not let you go because the boom is not good.
UnitedHealth’s stock gained 2.6% in the first half of 2022 , second only to Travelers Group’s (ticker: TRV) 9%, while the Dow Jones index fell more than 15% in the first half of 2022. These two stocks are among the few stocks that rose in the bear market in the first half of 2022.
The combination of these positive factors has resulted in UnitedHealth Insurance’s long-term revenue growth, and its stock price has been very stable for a long time, with much less volatility than the market. It is an outstanding student among the Dow Jones components.
Cons
The U.S. health care laws are extremely complex and have huge interests. Health care is the targets of politicians who are always concerned and reformed. Therefore, stock prices often fluctuate due to government policies, laws, or election factors. The most recent example is the implementation of the Obama administration’s original health care reform bill, the Affordable Care Act, which caused a major earthquake in all businesses, and the entire U.S. medical industry (especially the health care industry).
However, over the years, it has been proved that this bill will shake the medical industry established in the United States for more than half a century because of the huge stakeholders involved, so it gradually loses the spirit when it was introduced.
Related articles
- “UnitedHealthcare, the world’s largest health insurer, role model of Dow Jones“
- “The Rules of 10 Baggers” book release event and speech, Taipei (1:00~2:00 pm, 10/16/2022)
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