UnitedHealth Posts Pallid Results

Earnings barely meet estimates as key metrics deteriorate.
Publish date:

OKLAHOMA CITY -- The vital signs at


(UNH) - Get Report

continue to weaken.

Fourth-quarter results barely reached Wall Street targets, ending a long string of upside surprises, because of ongoing challenges in the company's core health insurance business.

Revenue of $18.71 billion was up just 3% from a year ago and down 5% sequentially. The results were just shy of analysts' average estimate of $18.78 billion.

Meanwhile, low taxes and generous share repurchases boosted the bottom line. Only with the help of buybacks, in fact, did fourth-quarter earnings per share manage to grow 10% and match the consensus estimate of 92 cents a share.

In contrast, net income rose just 3% to $1.2 billion in the latest period.

UnitedHealth weathered deterioration in a number of key metrics. Enrollment continued to suffer, with the company's customer base shrinking by 175,000 members over the course of the past year.

At the same time, health care costs kept marching higher, leading to an uptick in the company's medical care ratio. The company's commercial MCR -- a closely watched metric in the health insurance business -- jumped from 81.6% to 83.7% over the past quarter alone.

UnitedHealth's stock was down 6.3% in early trading.

On a bright note, UnitedHealth did keep its 2008 guidance intact. The company continues to forecast double-digit earnings growth, with profits expected to rise 13% to 14% over the course of this year.

But Sheryl Skolnick, senior vice president of CRT Capital, sees possible risks ahead. Yet for now, at least, she assumes that UnitedHealth's aggressive stock repurchases will continue to support the company's shares.

"If UNH ... has to scramble to justify its 2008 guidance on the conference call -- as we believe it will -- we see near-term downside in UNH shares limited to about the $50 level," Skolnick wrote on Monday. But it "appears to us that there is significant operating earnings risk here that could cause, if not a reduction in 2008 guidance later this year, then a lack of potential upside and/or a change in the composition of earnings that may not be priced into UNH's shares."