This article first appeared in The Telegraph magazine. Quaestor column.
Most investors enjoy the security that comes from owning shares of companies that are doing well and have bright prospects. It is much more difficult to hold onto or buy companies that are struggling and underperforming.
But that’s exactly what some of the world’s best equity fund managers are doing right now. UnitedHealth (USA: UNH), the largest health insurer and leading provider of healthcare services in the United States.
The shares are owned by 25 of them, each ranked in the top 3% of the more than 10,000 global equity managers controlled by Citywire. As a result, UnitedHealth has received the highest AAA elite rating. It is also one of the top 10 most popular U.S. companies among elite investors and is the best-funded healthcare stock in the world.
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Neil Kaufman, manager of the most successful fund, Baron Health Care, is one of these 25 elite investors, and UnitedHealth is his fund’s second-largest holding with 5.9% of assets. Assessing the company’s recent lackluster performance in its first-quarter letter, he assured investors that “we believe UnitedHealth should remain a core portfolio holding as a way to play on positive trends in demographics, population health and value-based reimbursement.” .
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Sources: Citywire/Morningstar, latest asset data.
As a long-time holder, Kaufman has good reason to exercise faith based on past experience. Listed in the US and available through most UK brokers, UnitedHealth shares have become an outstanding long-term investment. However, they lag the market by more than a year and will decline by 2% in 2024.
headwind
The mood is bad due to a number of problems. First, U.S. policymakers are shutting down UnitedHealth after the loss of customer data in its claims processing business following a cyberattack in February.
It will cost more than $1 billion to correct the situation, and the reputational damage should not be underestimated.
Elsewhere, policymakers have launched antitrust probes into whether the company’s health insurance unit is supporting its own health care business, Optum.
There are also concerns that rising health care costs for Medicare patients are eating into insurance margins while the U.S. government becomes less generous with payouts to insurers.
However, behind the negative noise is a business that is performing very well and much better than most of its competitors.
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Demographic megatrend
An aging population and a cash-strapped government mean more Americans will be forced to buy health insurance. As a major provider with a focus on affordable prices, UnitedHealth is well positioned to benefit, as evidenced by the addition of two million more customers during the first three months of the year.
The medical expense ratio (the share of insurance premiums eaten up to pay for medical expenses) has increased from 82% a few years ago to more than 84% today, but this has been offset by cost savings and efficiencies elsewhere.
A key appeal of UnitedHealth is that its businesses can be part of the solution to lower healthcare costs. Its Optum Health division plays a large role in the rollout of quality care programs in the United States. Here, healthcare providers are paid based on performance, quality, and cost savings, rather than simply the number of services provided.
Optum believes this will reduce healthcare costs not only for its own business, but also for the businesses of its competitors.
Other savings in healthcare costs can be achieved through Optum’s data and technology business, which helps healthcare clients become more efficient, including giving patients access to lower-cost medications.
To become better
Despite the cyberattack, underlying profitability was better than analysts expected, with the company maintaining its 2024 earnings guidance a few weeks ago.
Looking ahead, leading investors like Kaufman are confident that UnitedHealth can continue to grow earnings per share (EPS) by 13% to 16% over the medium term given its strong fundamentals.
About a quarter of the growth (EPS) is expected to come from spreading profits across fewer shares thanks to ongoing share buybacks. With a return on equity of 20% or more, the company is spending a lot of excess cash to finance these purchases.
Before the recent troubles, United’s strong business quality and impressive track record meant the company’s shares were trading comfortably at 20 times estimated earnings per share. The current valuation of 18 times consensus looks like a good long-term buying opportunity.
| Key Facts – UnitedHealth Group Incorporated | |||
|---|---|---|---|
| Market capitalization | $476 billion | Price | US$518 |
| 52 week high/low | US$555/ US$436 |
Return on invested capital | – |
| Highest price per profit | 17.9 | First dividend yield | 1.6% |
| Fastest EPS Growth | 10.9% | share price for 12 months | 6.3% |
Source: FactSet. EPS = earnings per share. Forecasts for the next 12 months.