Enlightened Capital Blog

Since I last wrote up UNH, the stock has slightly outperformed the S&P 500 Index generating a total return of 35% compared to 30% for the S&P 500. The purpose of this update is to provide a deeper dive into UNH’s Optum segment, which will be a key growth driver for UNH going forward. Additionally, this update will discuss the benefits that UNH derives from integrating its health insurance operations with Optum, which provides many unique advantages for UNH relative to its peers. Finally, a quick discussion of UNH’s new CEO and my expectations for strategic capital allocation going forward.

JPMorgan is the largest global bank with a market cap of $490bn, total assets of $3.4tn, and generates annual revenue of over $120bn. JPMorgan benefits from numerous competitive advantages including its massive scale, strong brand, and high customer switching costs. Furthermore, JPM has a leading market share across its four major businesses: Consumer & Commercial Banking, Corporate & Investment Banking, Commercial Banking, and Asset/Wealth Management. Specifically, JPM has the top global market share in Investment Banking and Capital Markets revenue, operates the largest U.S. retail bank, the 6th largest global Asset Manager, and one of the largest U.S. lenders to small and medium sized businesses.

PYPL is a leading payments company, operating a two-sided network with 377 million accounts, comprised of 348 million consumer accounts and 29 million merchant accounts. As of April 27^th, PYPL has a market cap of $316bn, and in 2020 generated $21.5bn of revenue and $5bn of FCF. PYPL’s network is massive, with 15.4 billion payment transactions taking place in 2020, totaling $936bn of TPV (total payment volume).

EQIX is the largest retail colocation data center operator globally, with a 20% market share. EQIX was founded in 1998 by Al Avery and Jay Adelson to help scale the growth of the internet by allowing competing networks to connect and share data (check out Tubes for a great description of the physical internet). EQIX provides customers with space and power (colocation revenue), the ability to interconnect with other customers, and operational support and installation assistance. EQIX operates 227 IBX (International Business Exchange) data centers in 63 markets across 26 countries. As of March 26th, EQIX had a market cap of $60bn, and the company generated $6bn of revenue and $2.9bn of EBITDA in 2020. Importantly, 94% of EQIX’s revenue is recurring with EQIX’s sources of revenue described below. From an operational perspective, EQIX's data centers have 99.999% reliability, which is crucial for its customers.

Investor-owned utilities provide electricity and gas to commercial, industrial, and residential customers. Roughly 80% of the sector’s earnings are derived from electric operations, followed by 15% natural gas, and 5% for other. The utility sector should deliver 9-10% annual returns for investors over the next few years, driven by a 3.5-4.5% dividend yield and an average 5-7% EPS growth rate for most utilities. Given how low risk the sector is from an earnings or disruption standpoint, I view total returns as attractive from a risk adjusted standpoint.

Ally is the largest online only bank in the U.S. and one of the largest banks in the country with $183bn in assets. The market currently underappreciates Ally’s ability to grow earnings over the next few years, as the stock trades at 9x 2021 consensus EPS and 7.5x 2022 consensus EPS. Personal and Commercial Auto lending and Auto related insurance, account for 90% of Ally's earnings, and auto market fundamentals remain strong with high trade in values for used vehicles and robust auto loan demand. Additionally, Ally continues to increase its dealer relationships, which has led to a substantial increase in auto loan appliations over time. Furthermore, Ally has expanded beyond its dominant position in personal and commercial auto lending into other asset classes including mortgages, personal loans, and commercial loans, as well as into wealth management through its online banking platform.

After struggling from 2013-2017 through a data breach, unsuccessful expansion into Canada, and weak growth, Target restored itself by successfully executing on its e-commerce strategy. Target has leveraged its roughly 1900 stores as ecommerce distribution centers, remodeled stores, launched a loyalty program, and expanded merchandise selection. This transformation has led to improved ROIC’s and strong EPS growth from 2017-2019, with further improvements in 2020 driven by the COVID-19 pandemic. Strong e-commerce sales (+163% YTD), and much larger average basket sizes (+15% YTD) have led to record revenue and EPS for Target in 2020.

ENB is one of the largest North American midstream companies, generating annual EBITDA of more than C$13bn and Distributable Cash Flow (DCF) of more than C$9.4bn. ENB is well diversified across liquids pipelines, gas transmission pipelines, a gas distribution utility, and renewable power generation. ENB’s earnings have been extremely stable over time, driven by the constructive regulatory environments ENB operates in, which minimize both commodity price risk and volumetric risk. Furthermore, ENB has a strong asset base, transporting 25% of all crude oil in North America including 2/3’s of all Canadian exports to the U.S., and transporting 20% of all the natural gas consumed in the U.S., in addition to owning the largest Natural Gas Distrubtion business in North America.

ISRG is an excellent company demonstrated by its 92% market share in robotic assisted surgery, generating strong ROE’s over time, and with strong growth opportunities ahead. ISRG enjoys a first mover advantage in robotic surgery with more than 20 years of experience selling robotic surgery systems and backed by more than 22,000 peer reviewed articles supporting the clinical and economic benefits of robotic surgery compared to open surgery and minimally invasive surgery (MIS). Furthermore, the robotic surgery market is characterized by high customer switching costs and regulatory barriers. These switching costs are driven by the large capital cost for the robotic systems, and the substantial amount of training surgeons undergo to operate these machines. Furthermore, there are high regulatory barriers to entry, with regulatory approval required for new products to come to market.

Progressive is an attractive opportunity, and I expect the company to generate 12-15% IRR's for investors over the next 5 years. Progressive is a leading property and casualty insurer who has generated industry leading ROE’s over the past two decades driven by its excellent underwriting performance. PGR’s superior underwriting is driven by both a lower loss ratio and a lower expense ratio. Specifically, PGR prices policies on a much more segmented and granular basis than its peers, by utilizing telematics such as Snapshot for personal auto and Smart Haul for commercial auto. Additionally, PGR’s direct to consumer (DTC) marketing strategy and lower commission rates paid to agents have led to lower customer acquisition costs.