Managed care investors are hunting for a new reason to feel good.
For years, they relied on
to post strong results and spark hopes for the industry as a whole. These days, however, UnitedHealth keeps reporting weak metrics in its core commercial business -- including falling enrollment and rising medical costs -- that tend to fuel widespread concerns instead.
Now, by sharing their own second-quarter results this week, UnitedHealth's biggest rivals will try to repair some of the damage that the company has caused. CIBC World Markets analyst Carl McDonald is clearly hoping for the best.
"There is scant evidence, in our view, that any competing health plans have experienced higher cost trends, which should, we think, be borne out in the results reported over the next two weeks by
," McDonald wrote on Friday. Meanwhile, "it seems like United's stock performance this year will be largely dependent on multiple expansion -- which will be difficult for UNH to achieve if it is missing every quarterly metric except its bottom line."
Importantly, McDonald added, "in the near term, United's stock doesn't have a lot of catalysts, other than hoping that WellPoint and Aetna can report respectable results and buoy the whole group."
McDonald feels bullish about UnitedHealth nonetheless. He has an outperform rating on the company's stock, which he values at $60 a share. UnitedHealth rose a quarter Tuesday to $51.42. His firm hopes to secure investment banking business from the company going forward.
To be fair, UnitedHealth has made some progress since reporting first-quarter setbacks that hammered the company's stock. Now, analysts hope that WellPoint will show some improvement when it posts its latest results as well.
WellPoint, which has overtaken UnitedHealth to become the nation's largest health insurer in recent years, will issue its own second-quarter report before the market opens on Wednesday. That update will be the first one offered by the company's new management team.
WellPoint investors could probably use some fresh insight from those company leaders right now.
"After a first-quarter report that frankly raised more questions than it answered, we anticipate that a favorable MCR (medical-cost-ratio) print with the 2Q report could assist the shares in the near term," Bear Stearns analyst John Rex wrote last week. But "longer term, we believe that investors will continue to evaluate the management transition that has occurred over the last several months ... As the inaugural quarter for the new CEO and CFO, the focus/priorities articulated on the call will be closely watched -- though we would not expect any meaningful shift from the past."
Rex predicts that WellPoint will meet profit expectations for the first quarter, posting both enrollment gains and cost improvements, in the meantime. He has an outperform rating and a $93 price target on WellPoint's stock, which inched up 39 cents to $81.59 on Monday.
Rex has the same bullish rating on Aetna, although he foresees a slight profit shortfall when the company reports its second-quarter results on Thursday. He views the company's full-year enrollment outlook as aggressive as well. His firm seeks to do business with the companies it covers and holds a significant financial interest in Aetna's debt.
Meanwhile, Jefferies analyst Brian Wright recently raised his expectations for Aetna but kept his hold recommendation on the company's stock intact.
"Our estimates are now in line with the consensus targets for the quarter and FY '07," Wright wrote on Monday. But "key on the report will be the commercial MCR following higher
worse than expected commercial medical costs at UnitedHealth Group last week."
Sheryl Skolnick, senior vice president of CRT Capital Group, has been fretting about another crucial industry metric as well. She dwells on falling commercial enrollment in particular. And she has mixed feelings about relying on "affordable" consumer-driven health plans as a possible cure.
"At the root of our concerns about UNH -- and, frankly, the health insurance industry -- is the likely impact on revenue, profits and share-price performance of the pressing need to provide more affordable insurance products both from a strategic company perspective and from a political perspective," Skolnick wrote on Monday. "Unfortunately, affordable health plans means health plans that cost less -- i.e. that generate less revenue and therefore fewer profit dollars (even at the same or slightly higher margin percentages) than traditional high-premium plans.
"This compression of revenue per member per month means that consolidated revenues are growing more slowly today and, as UNH moves to even better address the need for more affordable plans, will grow even more slowly tomorrow."
Skolnick worries about UnitedHealth's booming Medicare business, too. Notably, she points out, Medicare-related gains fueled the company's recent upside -- and helped rival
even more -- but could wind up backfiring on the entire industry in the end.
"Given the tone in Congress," reflecting the Democrats' negative view of Medicare health plan profits, "this positive could turn into a political negative over the long run," Skolnick warns. "With these negative trends and the rising risks bred by the Medicare Advantage plans' own success, we believe that the upside to UNH's shares may be capped this year and believe that the stock could -- and should -- continue to trade in and around its current price."
Thus, she concludes, "we believe that our 'fair-value' rating remains appropriate."