had so much to prove.
In recent years, the company has routinely beaten Wall Street's lofty expectations and set a positive tone for its industry. This time, however, UnitedHealth will kick off the quarterly earnings season with its stock under pressure by investors concerned with far more than the company's latest results.
For starters, investors learned this month that the
Securities and Exchange Commission
has questioned UnitedHealth about its generous stock-option grants to executives. Thanks to those awards -- some made when the stock looked cheap -- UnitedHealth CEO William McGuire now has an estimated net worth of more than $1 billion.
Still, as the company itself likes to note, UnitedHealth investors have grown increasingly rich as well. Between 2000 and 2005 -- a period when the S&P 500 remained essentially flat -- UnitedHealth's stock more than quadrupled in value.
So far, however, 2006 has proved to be tough. The company's stock, down 24 cents to $53.22 on Thursday, has lost nearly 15% of its value this year.
To be sure, 2006 will bring its share of tests to UnitedHealth and the industry overall. Notably, UnitedHealth now runs PacifiCare -- a longtime leader in Medicare coverage -- following one of its biggest acquisitions ever. And it has emerged from that transaction as the nation's largest Medicare player at a time when the Medicare program itself is undergoing its biggest expansion in history.
Thus, for UnitedHealth in particular, major opportunities -- and challenges -- clearly loom ahead.
Wall Street has adjusted its views accordingly. For the first time in recent memory, one mainstream analyst actually recommends selling the company's stock. Meanwhile, even those who continue to embrace the stock -- as most still do -- feel some tension in the air.
"This quarter is arguably the most important quarterly earnings report for the entire year," Stifel Nicolaus analyst Thomas Carroll wrote last week. "The sharks are circling. ... (But) we continue to believe that United is a stock to own -- over the short and long term -- and believe that Dr. McGuire will stridently emphasize the positive opportunities for his company on the next call."
Carroll values UnitedHealth's stock at between $74 and $76 a share.
World of Opportunity
For the first quarter, Carroll expects UnitedHealth to beat the consensus profit estimate by 2 cents with earnings of 66 cents a share. Looking ahead, he believes the company will then go on to exceed full-year profit expectations by 3 cents -- with earnings of $2.93 a share -- even before taking into account significant stock repurchases.
Carroll feels that UnitedHealth will continue to benefit from rising premiums, coupled with falling medical cost trends, in the current year. Meanwhile, he portrays the company's new Medicare opportunities as downright "palpable."
All told, Carroll expects UnitedHealth to generate more than 25% of its revenue from Medicare this year. Right now, he notes, UnitedHealth stands out as "one of the very few companies that (is) deliberately emphasizing its success with the Part D program." The company now expects to enroll up to 6 million people in its Part D plans, he says, even though it continues to issue conservative earnings guidance based on just 5 million enrollees.
Piper Jaffray analyst Melissa Mullikin feels similarly upbeat. Indeed, she believes that UnitedHealth -- with its endorsement from AARP -- has actually benefited from all of the recent confusion surrounding the new Medicare Part D program.
"When faced with the prospect of comparing dozens of potential plans, we believe many seniors are turning to a brand they trust -- AARP -- as their choice for Part D," Mullikan wrote on Thursday. And "enrollment statistics would seem to back this view, as UNH's Part D enrollment has well exceeded initial estimates, while many of its competitors are running at or below enrollment targets."
Mullikan has an outperform rating and a $70 price target on UnitedHealth's stock. Her firm provides investment banking services to the company.
Still, even Mullikan is bracing for some volatile times ahead. In the near term, she believes that a number of complicating factors -- ranging from acquisitions to Part D to stock option expenses -- will "muddy" the company's first-quarter results. But she recommends buying the stock on any weakness if that happens.
In the meantime, Mullikan downplays the ongoing stock-option controversy. There is no question that UnitedHealth has granted options to its executives at favorable strike prices, or that -- in the past -- its CEO could even choose the date for those awards to take effect. However, Mullikan points out, McGuire gave up that power when his employment contract was amended last year.
Yet, going forward, the SEC investigation could still pose some threats.
"In our view, the unlikely catastrophic risk is that UNH's executive leadership -- including most prominently Dr. William McGuire, the CEO of United HealthCare -- is forced to leave," A.G. Edwards analyst Paul Newsome wrote last week. "There have been some notable examples of companies where the stock fell significantly, such as
, where regulatory investigations lead to management changes despite no significant change in the cash financial of the company. ... It should also be noted that these stocks rebounded as the regulatory issues subsided, but past performance does not guarantee future results."
In the meantime, Newsome has already stopped valuing UnitedHealth in the same manner that he did in the past.
Recently, Newsome lowered his price target on the stock by more than 15% -- from $72 to $60 a share -- after dropping the historic premium he has regularly added before. He cited the SEC inquiry as a trigger for that change.
Still, Newsome continues to recommend the stock.
"We have taken this opportunity to take a fresh look at UNH's shares and how we value the company," he explains. "In our opinion, UNH is a best-of-breed insurer in the managed health care sector. (And) we believe the firm's financial position, management, strategy and diverse suite of products and membership should help mitigate the risk in the stock for the foreseeable future."