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A Cheap, Wide-Moat Health Insurer

Jake Strole

Jake Strole: We’ve taken a fresh look at the managed care industry and have come away a bit more constructive in our outlook, particularly in regard to UnitedHealth. We think the firm has been able to dig a wide economic moat underpinned by scale-based advantages that ensure the company touches nearly every aspect of the healthcare system.

United is the largest private insurer in the country and is expected to generate over $240 billion in net revenue during 2019. With the largest private insurance book, a leading presence in Medicare Advantage, and supporting services through its pharmacy benefits, analytics, and provider platforms, United's breadth of scope makes it the standout in the industry. The firm's wide moat is supported by cost advantages and network effects that ultimately allow for a lower claims expense per member than United's comparably smaller peers. The combination of fixed cost leverage and a better negotiating position allows the company to post best-in-class returns year in and year out.

Management has built these advantages through uniquely thoughtful capital deployment, typically adding capabilities to the business years before peers follow suit. This long-term thinking drives our high opinion of current leadership and helps us have added confidence in our long-run expectations that call for excess returns to persist well into the next decade.

Concurrent with our moat upgrade, we’ve raised our fair value estimate to $300 per share. We believe the market is likely underestimating the durability of United’s competitive advantages, putting undue emphasis on policy uncertainty over the coming years. We think shares are attractive at current market prices and encourage investors to consider an investment in this wide-moat enterprise.