Name That Trade – $UNH: Dow Leader’s Check-Up

by Dan April 15, 2015 2:54 pm • Commentary

Event: United Health (UNH) reports Q1 results tomorrow before the open. The options market is implying about 3.3% one day move.  The April 17th $117 straddle (the call and the put premium) is offered at about $4 (stock at $117), if you bought the move, (the straddle) you would need a rally above $121, or below $113 by Friday’s close to break-even, or about 3.3%.

UNH is the second best performing stock in the Dow Jones Industrial Average, up 15.8%, but, was the best performing before today’s 2.5% decline.

A quick check of the chart since the start of 2014 shows the gradual rise for the better part of 2014 until the late October breakout to new all time highs that resulted in a near parabolic move of 50% over the next 5 months:

[caption id="attachment_52812" align="aligncenter" width="600"]UNH 1yr chart from Bloomberg UNH 1yr chart from Bloomberg[/caption]

The stock is trading at about 19x expected 2015 earnings which are expected to grow 9% on 9% sales growth.

Its interesting that the stock is down today when competitor HCA pre-announced positively, per Bloomberg:

HCA prelim. 1Q EPS $1.35, est. $1.14 (range 98c-$1.29); rev. $9.675b vs est. $9.55b (range $9.35b-$9.74b).

  • 1Q same facility admissions up 5.1%, same facility equivalent admissions up 6.8%

  • CEO cites continued favorable volume, payor trends in core ops for 1Q results

  • Sees year adj. EPS $4.90-$5.30, had seen $4.55-$4.95 (Feb. 3), est. $4.92 (range $4.75-$5.18)

  • Sees year rev. $39b-$40b, had seen $38.5b-$39.5b (Feb. 3), est. $39.0b (range $38.56b-$39.46b)

My View:  While the stock is not particularly cheap, we are in a market that has been continuously rewarding leadership on positive news, and, frankly, discounting negative news as conservative.  It is my sense that a beat and raise tomorrow, coupled with more color on the recently announced purchase of the prescription management company Catamaran for $13 billion could send the shares back towards last months all time highs near $120.  But the stock is priced to perfection, and the size of the deal could suggest that the company is searching for growth after a massive run in the stock at a time where the stock could screen as expensive on a PE to Growth.

Here are a couple ways I would play from the long or short side, with defined risk:

Bullish:  If I were inclined to play for a quick reversal back to the all time highs of $123 made on March 30th I would probably buy a call spread, like the April 17th 118/122 call spread for about $1, break-even at 119 with max gains of 3 at 122 or higher.

Bearish: On the flip-side, if today’s weakness is a pre-cursor to further declines on a miss and/or guide down I would consider buying the April 17th 116/112 put spread for about $1, break-even at 115, with max gains of 3 at 112 or lower.