YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

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UnitedHealth provides health insurance to more than 70 million individuals. Last Tuesday, as we expected, they posted strong results. One source of concern has been that with unemployment rising, membership from business health insurance plans will shrink. While there has been a reduction here, revenues from Medicare have more than offset this decline by continuing to grow at a healthy pace.

At $23/share, we believe UnitedHealth is significantly undervalued. Thus, we were excited to see they repurchased $700 million of their own stock over the past quarter. We estimate free cash flow per share to be in the $3-3.50 range. With 1.2 billion shares outstanding, at this pace, the company is returning 2/3 to 3/4 of free-cash flow to shareholders in the form of share repurchase.

The main reason for the favorable valuation resides in the political uncertainty surrounding the company. However, no matter what reforms are made in the Obama administration, health insurance is an essential service and somebody has to administer it. In fact, UnitedHealth is currently the largest administrator of Medicare plans, making up 25% of their revenue. We feel the cheap price will provide a satisfactory return, regardless of any changes coming.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Brian Yacktman | April 24, 2009 | Permalink

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