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Article / 21 September 2015 at 10:30 GMT

Alpha Picks: UnitedHealth is still a winner

Head of Equity Strategy / Saxo Bank
  • UnitedHealth stock is cheap given its strong growth rates
  • LyondellBasell rebounds from overreaction to China worries
  • Altice rises 19% on $17.7bn Cablevision acquisition
 UnitedHealth outclasses its peers on several fronts. Photo: iStock

By Peter Garnry

Today we release our top equity alpha picks across the mega, large and mid-cap segments on the US and European equity markets. We present our top 20 picks across each segment. The picks are based on our quantitative equity model utilising several well-known risk factors.

Business is good in US health care

UnitedHealth, the largest health care provider (health insurer) in the US, is up 23% this year as the health care provider is expected to deliver 18% sales growth y/y and 14% profit growth y/y. With a valuation of 10x EV/EVITDA it trades on par with the market which is cheap given its significantly higher growth rates. On top of that, UnitedHealth sports a 22% ROIC, clearly above the average, signaling the attractive returns on capital this industry provides to shareholders.

UnitedHealth share price since December 2014
UnitedHealth share price
Source: Saxo Bank 

The company boasts very stable operating margins and the outlook is very predictable. UnitedHealth pays consistently lower medical benefits relative to premium compared to its peers resulting in overall better financial performance over its competitors. In other words, it is a high quality stock. The stock was the best performing in our top 20 alpha picks among the mega cap segment which is up 4% the past week.

LyondellBasell bounces back

Last week the large US chemical producer LyondellBasell was our stock in focus as it had declined more than 6% in a week. Our view was that the decline represented a good entry point for long-term investors as the growth concerns in China had led to an overreaction in the stock price. The past week the stock has been the best performing of our alpha picks in the large cap segment up 4%.

LyondellBasell share price in 2015
LyondellBasell share price
Source: Saxo Bank 

The US chemical company has a large and diversified revenue of $39.7 billion in the last 12 months with an attractive EBITDA margin of 18.3% which is also expanding due to favourable underlying factors in the industry.

The company is currently benefiting from low US Henry Hub natural gas prices, driven by the US shale gas revolution, compared to global oil prices boosting margins.
What is a very attractive about the company is the fact that it has been able to expand operating margins in an environment with downward pressure on chemical prices due to increasing pricing power. In addition the company has a very low net debt to EBITDA levels.

The ROIC is 35.5% which is one of the highest ratios in the industry among the major players. As a result, the current low valuation is not reflecting the strong business fundamentals.

Altice takeover lifts stock by 19%

Last week Dutch Altice agreed to buy Cablevision for $17.7bn pushing the stock up by 19% in a bid to strengthen the US cable market creating the fourth largest cable provider in the country. The takeover follows the acquisition of Suddenlink back in May for $9.1bn, taking Altice into the US cable market for the first time.

Cablevision stock price in 2015
Cablevision share price
Source: Saxo Bank 

Cablevision is a very attractive business and the valuation post the bid is still fair, so the bid from Altice may entice other US cable providers to head into a bidding competition.

Cablevision is part of our Saxo Equity Alpha Picks portfolio and helped our portfolio producing alpha last week. The portfolio is only available to Saxo Bank clients on request through a sales trader.

Find all alpha picks across the mega, large and mid-cap segment in the attached PDF.

– Edited by Clare MacCarthy


Peter Garnry is head of equity strategy at Saxo Bank

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