A Form 4 filed with the SEC has disclosed that Rodger Lawson, a member of the Board of Directors at UnitedHealth Group Inc. (NYSE:UNH), bought 2,000 shares on January 18th at an average price of $54.42 per share. Lawson now owns close to 17,000 shares of the stock directly. UnitedHealth, a health insurer who joined the Dow Jones Industrial Average last year, has risen 25% since a year ago. Insiders should hesitate to purchase more shares of the company’s stock, since they already benefit financially when business is good and see their income decline in bad times. The exception would be if the benefits of diversifying are trumped by a particularly strong chance of a gain in the stock price; this in our view is why stocks bought by insiders tend to do well (read more about studies on insider trading).
UnitedHealth’s revenue was up 11% in the fourth quarter of 2012 compared to the same period in 2011, but margins contracted and as a result earnings were actually down slightly. The 12% growth rate in medical costs was particularly notable. For the year as a whole, the company reported a 9% increase in sales and a 7% increase in net income. The market capitalization of $58 billion- the largest among publicly traded health insurers- values UnitedHealth at 11 times trailing earnings. Analyst expectations are for low growth in the next couple years and so current-year and 2013 P/Es are in the 9-10 range. These are low valuations, and even if the company does not see much of an increase in earnings it could be a good buy at these prices. We’d also note that UnitedHealth Group Inc. has a beta of 0.5, indicating that it is somewhat protected from market downturns.
UnitedHealth Group Inc. was one of the most popular healthcare stocks among hedge funds in the third quarter of 2012, according to our database of 13F filings (find more healthcare stocks hedge funds loved). Billionaire Dan Loeb’s Third Point reported a position of 2 million shares, an 11% increase from three months earlier (see more of Loeb’s stock picks). Renaissance Technologies, whose founder Jim Simons is now a billionaire, and fellow billionaire Leon Cooperman’s Omega Advisors were two other hedge funds with significant positions in UnitedHealth. Check out more favorite stocks from Renaissance Technologies and from Omega Advisors.
Recent performance and valuation at UnitedHealth turns out to be similar to that of its peers:
The company’s peers include Aetna Inc. (NYSE:AET), Humana Inc. (NYSE:HUM), WellPoint, Inc. (NYSE:WLP), and David Einhorn favorite CIGNA Corporation (NYSE:CI). The pricing at these other insurance companies is very similar to that at UnitedHealth: when we look at the industry, we generally see trailing and forward earnings multiples of 10 or lower. We think that this makes any insurer at least worth considering as a value stock. Of this group, Cigna stands out as recording impressive revenue and earnings growth in its most recent quarter versus a year earlier, though certainly some of that growth is due to a recent acquisition and Cigna’s organic growth potential should be evaluated further before concluding that it is particularly attractive. Besides that, earnings growth in the industry has tended to be very limited, generally within 5% of its levels a year ago.
We like UnitedHealth’s valuation, along with that of many other insurers, in any case. Given the insider purchase worth over $100,000 and the confidence that should signify, we would lean towards considering UnitedHealth a good value and we think that investors should do more research on the company. If investors pass on UnitedHealth for reasons other than a general dislike of health insurance companies as investments, they would then be well served to consider peers in the industry.
Disclosure: I own no shares of any stocks mentioned in this article.
