My notes and own analysis from Kenneth Marshall’s course on Value Investing (available through Stanford Continuing Studies) is for general guidance and does not serve as investing advice.
Six parameters to evaluate a business include: Products, Customers, Industry, Form, Geography and Status
- Products
- What Goods or Services does the company sell?
- Customers
- What is the breakdown in customer base?
- Does any single customer account for a large portion of the sales volume? If so, would the business be able to survive without this customer?
- What is the demographics of the customer base?
- Industry
- What industry and sub-industry does the company compete within?
- What are the macro trends affecting that industry? Headwinds and tailwinds? How is the company performing compared to industry benchmarks?
- Form
- Legal form of the company that you want to define (e.g., LLC, C-Corp, GmbH)
- Anything distinctive about their operational form, e.g., are they a manufacturer or a producer
- Franchisor or Franchisee?
- Geography
- Where are they headquartered?
- Where is revenue coming from?
- Where are operations based?
- Status
- Is the company a fading legacy player? The incumbent? Emerging?
- What is the latest PR? Have they been rocked by scandal?
Sample stock analysis
Note all data referenced below extracted from public filings, including annual reports and news articles.
UnitedHealth Group offers insurance services through its subsidiary UnitedHealthcare, healthcare products including data and analytics solutions through its subsidiary, Optum, and pharmacy services through subsidiary OptumRx. The company has four reportable business segments; the first is UnitedHealthcare, which includes UnitedHealthcare Employer & Individual (E&I), UnitedHealthcare Medicare & Retirement (M&R), UnitedHealthcare Community & State (C&S) and UnitedHealthcare Global. UnitedHealthcare generates revenues through premiums on risk-based products (i.e., health insurance plans) and comprises ~80% of 2019 sales. In terms of product growth, UnitedHealthcare’s Global and Medicare and Retirement businesses (comprising ~5% and ~43% of overall UnitedHealthcare 2019 revenues, respectively) have been growing fastest at 13% p.a. and 12% p.a., respectively, between 2017 and 2019 (overall UnitedHealthcare growth of 9% p.a. during the same period). UnitedHealthcare’s Employer and Individual business has been growing the slowest at only 5% p.a. during the same period.
The second segment is OptumHealth, which generates revenues through its network of nearly 50,000 employed, managed or contracted physicians, and comprises ~13% of 2019 sales (27% of Optum 2019 sales, before Optum eliminations). The third segment is OptumInsight, which generates revenues through sale of its data products and services (e.g., population health and risk analytics products, technology for claims editing, technology and strategy consulting services). This segment comprises ~4% of 2019 sales (9% of Optum 2019 sales, before Optum eliminations). The final segment is OptumRx, which provides a full spectrum of pharmacy care services to ~60M U.S. consumers through its network of ~70,000 retail pharmacies. In 2019, this fourth segment comprised ~31% of sales (66% of Optum sales, before Optum eliminations). Across these four segments, the company is highly diversified, serving patients, providers, other payers, industry players as well as government organizations. By product line, premiums comprise ~78% of 2019 sales, products 13%, services 8% and investments and other at 1% of total consolidated revenues, indicating some concentration in premiums representing nearly 80% of overall revenues.
Customers
In terms of customers, each segment of the business serves a different player in the broader healthcare ecosystem. UnitedHealthcare serves large national employers (e.g., Target, Best Buy), public sector employers, mid-sized employers, small business, as well as individual consumers through the health insurance market exchange; UnitedHealthcare’s M&R and C&S divisions serve individuals, non-profits (e.g., AARP), and state customers who are Medicare and Medicaid beneficiaries (e.g., Children’s Health Insurance Programs (CHIP), other state and community healthcare programs). C&S participates in programs across 31 of the 50 U.S. states and the District of Columbia. UnitedHealthcare Global serves multinational and local business, governments, other payers and individuals globally, but primarily in Brazil, Chile, Colombia, and Peru (and in over 140 other countries). Optum serves consumers, pharmacies, hospitals, physicians, practices, other healthcare facilities, employers, health plans, state, federal and municipal agencies, lifesciences and medtech organizations, with low concentration risk given Optum’s clients include more than 5k hospitals, 80k physician practices, 60M individuals, and 300 health plans (note: limited details available in 2019 annual report).
Status and Geography
UnitedHealthcare is the leading incumbent in the healthcare services industry and was founded in 1977 (renamed as UnitedHealth Group in 1998) with headquarters in Minnetonka, Minnesota. It is a corporation and has the ticker UNH on the NYSE. The company operates in the U.S. (~96% of 2019 sales), and globally (~4% of 2019 sales), primarily in South America. The company has had multiple acquisitions over the years, including $8.3B worth of acquisitions in 2019 (including Diplomat Pharmacy for $300M, PatientsLikeMe for an undisclosed sum and Equian for a reported $3.2B).
In terms of its performance indicators, the company has historically been good. The return on assets is 10.3%, free cash flow return on capital expenditures between 9% and 10% (with cash), the delta operating income / fully diluted shares is 15%, the delta of free cash flow / fully diluted shares is 20%, delta of book value / fully diluted shares is 13% and the delta tangible book value / fully diluted shares is 14%.
With respect to future outlook, the company seems to be poised for continued success. The customer base is broad and, despite the threat of Medicare for All, given Biden’s surge in popularity and GOP’s reluctance to provide single-payer insurance, it seems privatized health insurance players like UNH will continue uninterrupted for at least several more years. The bargaining power of customers is weak, though could be strong in some markets (e.g., with key accounts for E&I, as larger corporations bring healthcare services in-house), bargaining power of suppliers is weak given UNH is powered by its own internal subsidiaries (e.g., Optum for data and analytics platforms), threat of a substitute is strong, given health insurance (which comprises ~80% of 2019 sales) is largely undifferentiated and commoditized, though threat of new entrants is weak (new entrants Oscar Health, Bright and others may have some growth but cracking the larger nut of the risk adjusted premium business has proven to be difficult, and Oscar – once a startup darling, has fallen in recent years). The company has a moat given its incumbent status (according to the 2019 proxy statement, UNH is at the 97th percentile on a revenue basis, compared to 54 “peer group” companies). Market growth is anticipated to be strong over the next several years, particularly after a pandemic like COVID-19 spurs individuals to pick up insurance on their own; due to rising unemployment, however, UnitedHealthcare’s E&I business may suffer in the near-term. Shareholder friendliness is ok, with the highest-compensated individual in 2018 earning $21.2M (EVP and CEO of Optum, Andrew Witty), and second highest earning $18.1M (CEO of UnitedHealth Group). This represents 0.16% and 0.14% of 2018 free cash flow, respectively. CEO David Wichmann also owns shares with a value of ~$220M equal to 169x his base salary, which in 2018 was $1.3M – this seems a bit excessive by global standards but perhaps comparable to other Fortune 5 executive compensation rates. The highest compensated director in 2018 earned $406K (Committee member, Richard Burke), which does not seem excessively high (in comparison to EVP and CEO compensation). In terms of ownership, all current directors, executive officers and director nominees (17 individuals) own less than 1% (0.82%) of common stock outstanding (as of April 2019, there were 952,244,528 shares issues).
Finally, UNH stock (currently 248.5 USD) does not appear to be cheap currently, given that market cap over free cash flow is equivalent to ~15 (target of times free cash flow less than or equal to 8). Enterprise value over operating income is equivalent to ~12, so not ideal given a target less than or equal to 7. Market cap over equity is ~3.9 (target less than or equal to 3), and market cap over tangible book value is approximately -15.
Request the above stock analysis template here.