UnitedHealth Shares Sent Reeling
OKLAHOMA CITY --
UnitedHealth
(UNH) - Get Report
has delivered a sickening first-quarter report.
The giant health insurer earned less money than it did a year ago, as customers sought better service at cheaper prices elsewhere. Revenue did climb 7% to $20.3 billion, topping the consensus estimate, due to growth in some low-margin businesses. But net income slipped 4% to $994 million, with earnings per share of 78 cents coming in a penny shy of Wall Street targets.
UnitedHealth has also joined some of its largest competitors -- including
WellPoint
(WLP)
and
Humana
(HUM) - Get Report
-- in scaling back its outlook for the year. The company now expects to post a full-year profit of $3.55 to $3.60 a share. Analysts had been hoping for $3.85 a share.
UnitedHealth's stock plummeted 9.4% to $34.24 on the news. The shares now hover near the bottom of their wide 52-week range.
Even UnitedHealth's own CEO, Stephen Hemsley, portrayed the company's latest results as unacceptable. Hemsley promised to strengthen organic growth, while cutting excess costs, going forward.
But he also announced another management shakeup -- including a promotion for the head of the company's struggling commercial health insurance unit -- in the process.
That move proved to be the final straw for CRT Capital Group analyst Sheryl Skolnick, who responded with a swift downgrade of UnitedHealth's stock.
"Our downgrade is more due to a collapse of confidence in management than to the particulars of either the 1Q08 report or guidance," Skolnick wrote on Tuesday. At this point, "we are a lot more comfortable being cautious -- or even downright negative -- than positive about UNH as both a company and a stock."
Skolnick now has a fair-value rating, with a negative near-term bias, on UnitedHealth shares. Her firm makes a market in the company's securities.
Goldman Sachs analyst Matthew Borsch felt nervous about UnitedHealth even before Tuesday's disappointing update. Still, Borsch seemed surprised by just how weak some of the company's key metrics -- such as enrollment, medical costs and cash flow -- proved to be. He expected a similar reaction from the market itself.
"Most investors were already prepared for bad news this quarter," wrote Borsch, whose firm has investment banking ties to UnitedHealth. "But we still expect UNH stock will see incremental selling pressure.
Meanwhile, our EPS and price target are under review."
Borsch dwelled on UnitedHealth's commercial risk-based business in particular. The company lost 530,000 of those lucrative accounts last quarter alone.
For its part, UnitedHealth said that "the stronger-than-anticipated decline in commercial risk business is in response to stronger net premium yields" than the company has achieved in the past. In everyday terms, that means that customers shunned the company's policies because they felt that they were no longer worth the price. Even so, those rising premiums failed to completely offset escalating medical costs -- including an $80 million hit from the flu -- during the latest quarter.
UnitedHealth has been known to "misprice" its policies in the past. But Skolnick fears that the company could face a bigger problem this time around.
"We worry that UNH and other health plans have simply priced themselves out of the 'market,' meaning that the combination of plan design, pricing and service no longer offers a compelling value to consumers," she wrote. "Reputational issues ... only serve to make UNH's turnaround task more difficult and make our discomfort with the notion of owning these shares more intense.
"We recommend that investors proceed with caution."