Full disclosure, fellow investors: I'm as perplexed by the
health insurance reform "conversation" as the next sentient
citizen. Year in and year out, the cost of health care
out-inflates all comers, and yet the beat goes on. And on and
on and on ...
So too does the beating we all take in the form of higher
insurance premiums. The math only gets uglier the farther out
you look. The U.S. will spend roughly $2.5 trillion on health
care this year, after all, and over the past 10 years,
health-care costs have increased at four times the rate of
inflation.
Four times!
Here's a shocker
Dyed-in-the-wool cheapskate that I am, I too have an
overheated opinion about what should happen on the health
care front, but I'll spare you yet another one of those and
cut to the chase: Plain and simple, the stock to buy if
Obamacare looks destined to lose is
UnitedHealth Group .
For my money, it's the insurance industry's best operator
-- though, to be sure, it's struggled of late. The
Minnesota-based concern has posted anemic earnings over the
last three years, for example, even as its industry average
rose at a double-digit clip. More bad news: UnitedHealth's
debt profile goes the
otherway, with the company's debt/capital ratio
surpassing the level of leverage sported by close competitors
such as
Aetna and
WellPoint .
So what's UnitedHealth got that those companies don't?
Just this: A valuation profile that prices the company
well below even a painstakingly conservative estimate of fair
value. The company is cheaper than the broader market (as
measured by the S&P 500), and it's trading at a healthy
discount relative to peers in terms of price-to-cash flow
over the last 12 months, too.
About that cash flow: UnitedHealth delivered roughly $3.5
billion of the stuff in fiscal 2008. And while that
represented a sharp reduction relative to frothy fiscal years
in 2006 and 2007, the company is on the comeback trail,
posting almost $4.3 billion in FCF over last 12 months.
Industrial strength?
I suspect those will turn out to be Foolishly wise
purchases of a great company in an industry poised to profit
once the uncertainty discount currently afflicting health
care fades -- and with it, perhaps, any chance of significant
near-term cost controls. The market absolutely hates mystery,
after all, a dynamic that can afflict even "safe haven"
sectors like health care.
All of which leads to this question: Why not just bypass
the uncertainty for now and go where the growth already is?
Gilead Sciences (Nasdaq: GILD) and software
concern
VMware (NYSE: VMW), for example, have
delivered remarkably strong operating and net margin results
amid tough times. So too have
Diamond Offshore Drilling (NYSE: DO) and
Coach (NYSE: COH).
What's more, if analysts are even just
directionallyaccurate, there's more growth where
that came from: That fantastic four are expected to increase
earnings at a double-digit clip over the next five years.
Wall Street's rosy scenario spinners are even rosier when
gauging the prospects of
Amazon (Nasdaq: AMZN),
Research In Motion (Nasdaq: RIMM), and
Barrick Gold (NYSE: ABX), estimating earnings
expansions in excess of 20% over the next half decade.
On that particular power trio: Amazon seems a safe bet for
outsize (if not necessarily 20% plus) earnings growth; it's
the not-so-new
Wal-Mart , after all. But Research In Motion?
No way.
Apple is currently munching its way through
the company's smartphone market share, even as diminished
business spending also chomps at the bottom line. Continued... |