UnitedHealth Regroups

With the New Year approaching, UnitedHealth Group (NYSE: UNH  ) put its best foot forward and provided investors with what it sees as things to come. The health insurer should be able to move past damage control and take the fight back to Aetna (NYSE: AET  ) , Wellpoint (NYSE: WLP  ) , and Cigna (NYSE: CI  ) . Here are some of this Fool's takeaways from UnitedHealth Group's investor presentation.

First, let's get the stock option issue out of the way. Management disclosed that the GAAP restatements involving the backdated stock options could account for $400 million to $600 million in non-cash charges under SFAS 123 rules. Still unknown is the IRS tax bill relating to the potential failure to withhold taxes and resulting penalties and interest. And those won't be non-cash.

Second, for those building discounted cash flow models, here are some of the company's estimates. Management expects 2007 revenues to be $79.5 billion and to continue to grow organically at 10%, which means acquisitions could boost that number. Earnings are estimated to grow at 15% over the next five years. The accelerated earnings growth above revenues is due to projected operating margin expansion, as well as stock repurchases. Free cash flow should be $5.2 billion to $5.5 billion for fiscal 2007, sans any acquisitions or tax benefits from stock option exercises.

As for uses of free cash flow, UnitedHealth Group plans to use a majority of it for stock repurchases. UNH stated its goal to repurchase $4 billion to $4.5 billion in fiscal 2007, almost doubling 2006's $2.3 billion repurchases. If you believe the company is worth more than its current stock price, then these buybacks should create additional value. However, until the backdating issues are resolved, the repurchase program is currently suspended.

And the previous ethical lapses surrounding the stock option backdating bring us to the third takeaway -- corporate governance. Earlier this year, fellow Fool Philip Durell wrote an open letter to UnitedHealth Group discussing the need for better governance. This type of attention bordering on outrage from investors and the media forced the company to find religion. Reading through the list of additional measures is like reading corporate governance's best-practices handbook -- an encouraging sign.

Wrapping it up, there were lots of positives in the presentation. However, this Fool, never one to be on anyone's bandwagon, recognizes that the positive tone of the conference doesn't necessarily mean UnitedHealth's stock is a great investment. So please, do your own homework.

For related Foolishness:

UnitedHealth is anInside ValueandStock Advisorpick.

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Fool contributor Matthew Crews welcomes your feedback -- really! He has no financial position in any of the companies mentioned. The Fool has a disclosure policy.


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