Vladyslav Koptiev
Vladyslav Koptiev
Malta
3mo
$UNH (UnitedHealth) looked safeโ€ฆ until Washington decided otherwise. My updated DCF shows UnitedHealth might be mispriced (once again). ๐—ž๐—ฒ๐˜† ๐—ฎ๐˜€๐˜€๐˜‚๐—บ๐—ฝ๐˜๐—ถ๐—ผ๐—ป๐˜€ (๐—ฐ๐—ผ๐—ป๐˜€๐—ฒ๐—ฟ๐˜ƒ๐—ฎ๐˜๐—ถ๐˜ƒ๐—ฒ): 1. Explicit 5Y growth @ 4-5% 2. Long-term growth in perpetuity @ 2.6% 3. Margins stabilization back to 8% (slightly lower than historical) in year 10. 4. WACC @ 8.4%. 5. An EBITDA exit multiple of 10 6. Tax rate 21% 7. The input that drives reinvestment is the most recent Sales to Capital ratio = 2.2 ๐—›๐—ถ๐˜€๐˜๐—ผ๐—ฟ๐—ถ๐—ฐ ๐—š๐—ฟ๐—ผ๐˜„๐˜๐—ต (๐—ณ๐—ผ๐—ฟ ๐—ฐ๐—ผ๐—ป๐˜๐—ฒ๐˜…๐˜) Over the last decade UNH delivered roughly ~10โ€“13% CAGR of Revenue growth and ~13โ€“16% CAGR of EPS growth. However, that was during favorable Medicare Advantage expansion, margin expansion, heavy buybacks, strong Optum growth. The environment today is tougher. Therefore, I will be using a conservative 5-4% growth for the explicit 10Y period. ๐—•๐—ฎ๐˜€๐—ฒ ๐—ฐ๐—ฎ๐˜€๐—ฒ UnitedHealth historically created significant value, with consistently high ROIC in 14-15% range. However, recent regulatory changes in Medicare Advantage and Medicaid, combined with medical cost inflation, pushed down ROIC to the high single digits. These events effectively have shifted costs to shareholders, who now bear the impact through reduced margins and EPS. My valuation indicates the stock is trading at an 18% discount to the estimated intrinsic value of $ 354. If this discount is adjusted to fair value within three years, it could yield approximately 7% annual alpha. Below, I outline the risks that could impact the realization of this potential alpha. ๐—˜๐—ฟ๐—ผ๐˜€๐—ถ๐—ผ๐—ป ๐—ฟ๐—ถ๐˜€๐—ธ๐˜€ โ†’ Medical cost inflation compressing margins โ†’ Regulatory changes to Medicare Advantage/Medicaid reimbursement and risk adjustment โ†’ Provider consolidation increasing countervailing bargaining power โ†’ Employer and government buyers carve out PBM/care management to best-of-breed vendors โ†’ Antitrust/vertical-integration scrutiny and potential conduct remedies โ†’ Data-sharing or interoperability requirements reducing integration advantage ๐—–๐—ผ๐—ป๐—ฐ๐—น๐˜‚๐˜€๐—ถ๐—ผ๐—ป: UNH currently makes up 4% of my portfolio. I'm holding onto it for now, despite the fact that the alpha isn't very appealing at this moment. I purchased it at $ 308, but the current situation differs from when I first established my position. ________________________________________________ Keep in mind that this is an estimate - just like any DCF model. Consider DCF model primarily as a thinking tool, not a stock-picking tool (although it can assist in stock selection). Disclaimer: This post is for informational and educational purposes only. I own shares in UNH and can buy/sell them at any time after this post is published. Not financial advice. Do your own research.
Not investment advice. The author may have financial interests in the mentioned instruments.
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