RTCrawford’s Weblog

Three SHLD Charts

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1. This is off-topic, but didn’t know where to post this. After a two month rally, the health insurers are down big today on the government essentially undercutting medicare advantage. Any thoughts on the long term impact of this on the valuation of UNH and the health insurers?

   Some quotes from the article:
   “”We believe that budgetary strain and sentiment shift on Capitol Hill will cause 2010 (Medicare Advantage) plan changes to drain the profitability from the program,” Shove said in a research note.”
   “Goldman Sachs analyst Matthew Borsch said he had expected an increase in the range of 3 percent to 5 percent, well above the proposed 0.5 percent increase.

   “The bottom line is that (Medicare Advantage) plans will need to cut benefits to maintain profit margins, which could be tricky with many more plans competing for MA lives relative to prior years,” Borsch wrote in a research note.”

   http://www.reuters.com/article/marketsNews/idINN2330159620090223?rpc=44

   

   SC

   February 23, 2009 at 10:47 pm

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2. SC, thanks for the question. The increase of half a percent is consistent with expected inflation and the urge by government to limit deficit spending at a time when such spending is exceedingly large. The single-year return based on replication value and cash value is greater than 10 percent for UNH, however. This suggests the stock is undervalued without referencing or projecting future revenues.

   Personally, I question whether the proposed 0.5 percent increase is little more than an opening gambit in a negotiation process between government and industry. If so, it is unlikely to work, given provider margins. Government attempted this prior to 2000 and the results were not pretty for Medicare or HCFA. Prices rose, seniors were dropped from the rolls, insurance exited Medicare+CHOICE in waves, and AARP became the most powerful lobby in Washington.

   Having said all that, this is not a stock for the risk-adverse or the conservative investor. I would consider it a hold, but that is how I view the market broadly at this point. Candidly, I have not written about investing for some time because I don’t short and the macro forces undermine a long perspective until the market and economy achieve some measure of stability. We have another wave of housing-related issues likely to arrive toward the 4th quarter of this year, commercial real estate is problematic, retiring boomers will increasingly shift invested savings from equities to bonds, and non-invested savings is rising — which is good for bonds and agnostic for equities.

   Many are concerned that we will witness a lost decade in the US. For a value investor, that is fine. Value investing is a conservative approach that benefits most when the market is stable. When the market is booming, values are hard to find. When the market is imploding, nothing is safe and traditional assumptions about margins and cash flows are unreliable. When inflation is rampant, savings are undermined. But when the market is stable, undervalued firms are rare but available for those who understand how to value equities.

   Keep in mind that, while discounted cash flow analysis is not the only approach to valuing stocks, it is predicated on predictable free cash flow growth rates. In other words, it seeks to value a stock using techniques similar to those employed in the valuation of bonds (with their predictable payments and values at maturity). Besides, Buffett’s admonition to become greedy when others are fearful is fine if that fear is overblown. With recessions, fear becomes excessive and opportunities increase. With depressions, the same holds but you are better advised to value cash.

   A short time back, I posted a chart indicating that the market is fairly valued in this range. It is not yet undervalued at mouth-watering levels, in my view. Consequently, I have not bought or sold in some time, and my largest position is cash.

   

   rcrawford

   February 23, 2009 at 11:47 pm

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3. wow, in three days UNH has lost a third of it’s value. At ~20, the price is not much above it’s investment portfolio value and cash holdings. Is this overblown or is Obama’s plan going to fundamentally impair the profitability of the insurers?

   “President Barack Obama is expected to propose in his budget blueprint Thursday a mix of tax increases and health-care spending cuts to fund an ambitious health-care agenda. By far the biggest portion of proposed cuts, $177 billion over 10 years, would come from changing the way private-sector Medicare plans are paid by the government, according to a senior administration official.

   Currently, payments to insurers that provide Medicare Advantage plans are determined by a formula. Those payments have been on average 14% higher than what the government typically spends per beneficiary. Under the Obama proposal, insurers would be required to competitively bid to offer plans beginning in 2012, which the administration believes would lower per-patient outlays to the amount the government spends.

   While the details remain unclear, the $177 billion figure cited by officials suggests the administration expects the changes to effectively slash payments to private insurers more quickly than the industry anticipated. That could drive insurers with sizeable Medicare businesses to raise premiums or reduce extra benefits to enrollees in order to protect profit margins, or to leave some geographic markets altogether. The plans have been a huge growth engine for insurers grappling with flat or declining membership in employer plans. Some of the biggest Medicare providers include Humana Inc., UnitedHealth Group Inc. and Coventry Health Care Inc.”

   http://online.wsj.com/article/SB123560916922977285.html?mod=yahoo_hs&ru=yahoo

   http://www.reuters.com/article/marketsNews/idINN2543614320090225?rpc=44&pageNumber=1&virtualBrandChannel=0

   

   SC

   February 26, 2009 at 10:33 pm

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