The $5M Insider Vote of Confidence in United Health

Introduction

UnitedHealth Group (NYSE: NYSE:UNH) recently crashed after the U.S. Department of Justice might start a criminal investigation into the company. While this is a risk for investors, it is also an opportunity due to the cheap valuation and insider buying.

Fundamentals

Overall, UNH is a solid company. While it has only small gross profit margins of 21.99%, its EBITDA margin of 8.16% and strong ROE of 24.33% are far above the industry average.

Furthermore, the company has a slightly above average current revenue growth of 8.06% and forward revenue growth of 9.04%, while ROE is growing by over 30%.

In terms of valuation, the company is currently very cheap due to all the bad news that is currently circulating. The EV/EBITDA ratio of 9.72 almost shows a 30% discount to the industry’s median value. Furthermore, the P/S ratio of 0.72 is extremely low, considering that the industry average is at 3.34. While the P/B ratio is high at 3.08, the company also has a low P/E ratio of 13.5, a 50% discount to the industry median. This is especially low when compared to the P/E ratio over time, displayed in Figure 1. As can be seen, the ratio has not once been under 20 (at the end of the year) since 2018. Considering that the average P/E ratio, shown in Figure 1, has been 24.33, we are currently trading at a 45% discount to historical valuation.

Peer Group Comparison

When looking at the profitability of some of UNH’s peers, the company is one of the more profitable ones. Out of a peer group of 5 other companies, only Elevance Health (NYSE: ELV) has a higher gross profit margin at 27.74%. At the same time, no other company has a higher EBITDA margin and ROE than UNH, with ELV again being second but far away from UNH at values of 5.37% and 14.24%, respectively. An additional strength of UNH is the company’s strong 10-year CAGR of 12.4% vs the sector average of 8.9%, again suggesting that the company is one of the highest quality ones in its field. While free cash flow yield is not as strong as other valuation metrics, it is still solid at 5.1%, compared to 4.3% for Elevance and 6% for Cigna (NYSE:CI).

When looking at growth, UNH is still strong compared to the peer group, but Cigna Group (NYSE: CI) and Humana (NYSE: NYSE:HUM) both have higher revenue growth. Nevertheless, when looking at diluted EPS and ROE growth, only CI has higher numbers than UNH at 46.1% and 47.25%, respectively. In total, this shows that UNH is one of the fundamentally strongest companies in its peer group.

Figure 2 shows the valuation of the peer group, combined with revenue growth and gross profit margin, to get a better understanding of the different quality of the companies listed. As can be seen, UNH is one of the cheapest companies in terms of EV/EBITDA. At the same time, it has the second-lowest P/E ratio, with only that of Centene Corporation (NYSE: NYSE:CNC) being lower at 9.22. On the other side, however, UNH has the highest P/B and P/S ratios, which puts it valuation-wise somewhere in the middle of all the companies. However, since UNH is one of the, if not the best, companies in its peer group, it should normally be higher valued, suggesting that the stock is currently cheap. This also becomes clear when comparing it to other companies like CVS Health Corporation (NYSE: NYSE:CVS), which has lower growth and profitability but yet a higher valuation at an EV/EBITDA ratio of 10.71.

Current Insider Buying

The likely investigation into UNH is based on accusations that the company inflated the risk assessment of clients to receive higher payments. While UNH denies any wrongdoing, the Department of Justice is still to investigate the matter. Nevertheless, insiders are currently buying massively. Figures 3 and 4 show insider buying and selling on UNH stock over time, compare it to the industry average, and show its historic reliability. As can be seen, almost 10 insiders have already bought UNH since its big decline, while there has not been any insider selling. Furthermore, the 12-month insider buying is almost 5 times as high as that of the overall sector. Historically, the 5-year buying signal has also been more accurate than the sector average. Figure 5 also shows who bought it. Most importantly, are John Rex, the president and CFO, as well as Stephen Hemsley, the company’s CEO. Both bought shares for more than 4 million, showing a significantly increased exposure. This should especially increase trust, as both of them likely know the truth about the allegations and would not buy stock if they did not at least assume that they can achieve a favorable settlement or even a dismissal. At the same time, it is a sign that the company is currently undervalued and also increases the management’s commitment to pushing up the stock price.

Technicals

From a technical perspective, UNH currently looks terrible, which, of course, was to be expected given the already described situation. While a bottom might have formed at $275, it remains to be seen if it holds. As can be seen in Figure 5, both the 50-day and 100-day simple moving averages, as well as negative momentum of -46.45% on a 6-month and -37.83% on a 1-year time frame, indicate further high volatility and falling prices. Because of this, it makes sense to buy in tranches. One could, for example, build a small position now and increase it at the resistance at $275. However, since falling prices could be seen soon and since the trade is risky, investors should make the positions small enough to keep on adding in case of a further decline.

Conclusion

In total, UNH looks like an interesting value play at the moment. While the investigation does currently lead to short-term pain, it can also be seen as a chance for a cheap entrance into a fundamentally strong company. Furthermore, the insider buying confirms this thesis and at least hints at a more favorable outcome than the market currently expects.

This content was originally published on Gurufocus.com