Can UnitedHealth Really Keep Its Targets? (UNH)

UnitedHealth Group Inc. (NYSE: UNH) has made some rather bold predictions for 2009.  What is interesting here is that these projections are not showing continued growth nor showing total dominance.  But the possible surprise here is that this depends upon the state of just how bad things get in the economy and also upon several factors which might be outside of its control.

First, it now has an idea of what its year-end sign-ups will be.  Insurance companies over the last 45days and next 45 days will have enough fairly solid data on how they will do on enrollments and members for a year out.Companies rarely change plans during the middle of a contract becauseof the hassle, and even if they lay off workers they have to offer them COBRA plans.

Yesterday, the company reaffirmed some targets.  It gave forecasts of$2.95 to $2.98 for 2008 EPS and off $2.90 to $3.15 EPSfor 2009.  The net income for next year is estimated at $3.4 billion to $3.7billion.  That is also based upon 2008 revenue of $82.1 billion andupon 2009 revenues of $85 billion to $86 billion.  It also sees operating cashflows of roughly $5 billion for 2008 and also for 2009.  Its medicalcare ratios are now put at 82.2% this year and 82.7% (+/- 0.5%) fornext year.

Analysts have targets for this year at $2.95 EPS and $80.8 billion inrevenue.  Next year’s targets are $3.04 EPS and $84.3 billion inrevenue.  Both figures are from Thomson Reuters (First Call).

Today at its investor meeting, UnitedHealth said it could see north of5% declines in commercial enrollments in 2009 rather than an expected3% growth for 2008.  It estimated it could lose 1.0 to 1.5 millioncustomers next year from its estimates 26.3 million for 2008.  It citesattrition and price discipline for its new targets.  But it also seesgrowth in the government side of operations and expects roughly 31.885to 32.51 million total medical members in 2009.  These numbers are muchlarger if you include ancillary figures.

So how does this stack up against the stock?  Shares are essentiallyflat today at $20.10.  That gives a projected P/E ratio of 6.77 thisyear and a P/E ratio of 6.64 for next year.  United also has a marketcap of roughly $24 billion.  If its 32 million medical members were thewhole basis for valuing the company, then this would value each medicalsubscriber at roughly $745.00. 

While we ask if the company can keep these targets, it is obvious thatthe stock is cheap on the surface.  The questions of how insurancecompanies will do under Obama and the questions about what insurancecompanies have as far as investments and liabilities and who theircounterparties are tend to rule.  Those issues are what have kept a lidon the valuations here.

At roughly $20.00, its 52-week trading range is $14.51 to $59.46.

Jon C. Ogg
December 2, 2008