MIZUHO SECURITIES USA INC.  |  US EQUITY RESEARCH

Summary

In this report, we focus on what we see as the two most important things management said yesterday: 1) that UNH's growth 'just getting started' in key segments; and 2) that it is about to take a 'fresh focus at costs to drive better product price points. We present support for our view that UNH is not only uniquely positioned to fix the broken health care system, but also as a mega-cap early stage growth company, with the additional potential for both top line growth and expense efficiency to drive better than expected, consistent and sustainable earnings and FCF. We therefore raise our DCF/PE based 1-yr target to $235 and reiterate our Buy rating.

Key Points

Just getting started...Although President Dave Wichmann made that comment about the commercial business (monthly organic membership growth, in nearly every month for three years in the local group market, for example), we see that phrase as describing nearly every aspect of UnitedHealth Group’s growth. For example, not only is Optum in the early stages, but the health plan's synchronization with Optum is just getting started in the commercial business too. More, UHC appears to be reaping only the early benefit on customer acquisition and retention of using Optum's tools to create 51 premier provider networks, up from 3 just a few years ago. UNH's opportunities are big and complex: as we see UNH's mission as fixing the broken US HC system, it makes sense to look at that opportunity. In 2016, we spent $3.2T on HC in the US - slightly under the GDP of Germany and almost 33% more than the GDP of the UK - and we know not all of that spending made sense. That's the UNH opportunity set, in our view. See our report for more specifics.

A fresh focus on costs: In our experience, when UNH's CEO makes that kind of statement on an earnings call, good things follow. In this case, we see that streamlining costs across the enterprise not only offsets some of the risk associated with the return of the health insurance industry fee, but also could drive more competitively priced products without the threat of pricing irrationally. More, we don't think any meaningful cost savings are yet included in most 2018 estimates for UNH, but we have made a first attempt at including it in our refined 2018 EPS.

Finally, UNH shares likely have scarcity value as a unique large-cap growth stock: if ever the broader market returns to HC, we think UNH has to be owned in large cap portfolios and at a premium multiple. Our blended DCF/PE methodology drives a $235 PT with an increased LT unlevered FCF growth rate of 4%, which we justify in this report. UNH remains the best managed company this analyst has ever followed - and we buy good management.

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