OKLAHOMA CITY -- Managed care investors, wounded by
dismal third-quarter update, are now looking to
Aetna is expected to post strong results when it releases its own third-quarter report on Thursday. Another solid performance out of the Hartford, Conn., insurer would help to validate the stock's nearly 50% gain over the last year.
By now, however, United Health -- whose shares have been stuck in place for more than a year -- has already kicked off the earnings season with another dose of pain.
This time around, UnitedHealth sickened investors with a weak growth forecast and -- once again -- left rivals
and Aetna scrambling to calm the market's nerves. But WellPoint has already caused some queasiness of its own. Notably, like UnitedHealth, WellPoint has suffered a massive rate of executive churn. Thus, after years of recovery, Aetna now looks to some like the healthiest pick in the group.
Indeed, earlier this month, Wachovia analyst Matt Perry specifically passed over both UnitedHealth and WellPoint when selecting Aetna as his favorite stock pick. Quite simply, Perry said, Aetna leads the industry in several key metrics -- including enrollment gains and financial growth -- and should therefore trade at a premium to its peers.
Perry himself values Aetna's stock, which rose 10 cents to $53.42 on Tuesday, at between $59 and $63 a share. His firm has investment banking ties to the company.
To be sure, Aetna looks stronger than UnitedHealth right now. After a long string of disappointments, UnitedHealth really turned some stomachs last week.
Notably, during its recent quarterly update, UnitedHealth forecast its first sequential profit decline in more than a decade. Furthermore, the company finally admitted that -- even with help from financial engineering -- it can no longer grow earnings per share by at least 15% a year.
Indeed, experts now predict, the company could see its actual operating profits increase at just half that rate instead.
"While we are confident that management is trying to set achievable hurdles and therefore may prove to be too conservative in its outlook, we nevertheless believe that share repurchases could well outstrip operating growth and improvements as a source of growth," CRT Capital Group analyst Sheryl Skolnick cautioned on Monday. "Will the market award EPS growth from share repurchases the same multiple as it does core operating earnings?
"We do not believe so."
Skolnick feels UnitedHealth is fairly valued at its current price. The stock, up 75 cents to $48.88 on Tuesday, currently hovers in the lower end of its 52-week range.
Still, Skolnick sees further risks ahead. Specifically, she worries about ongoing disappointments in the core health insurance business that once drove UnitedHealth's stellar operating performance. She frets about the downturn at Uniprise -- which is losing its division CEO -- in particular.
Last week, Skolnick notes, UnitedHealth reported another decline in Uniprise membership and warned of further losses to come. Excluding a reversal in reserves, she adds, the division also posted earnings "significantly below" those generated just one year ago.
Even UnitedHealth itself has expressed disappointment in its commercial health insurance business. In response, the company has announced major changes -- including new products, expanding networks, improved service and better local market dynamics -- meant to reverse the negative trends.
But Skolnick, for one, sees a long and difficult road ahead.
"It is the core business that tends to drive both overall company performance and investor perception," she stresses. But "if UNH had to rely on its commercial business alone, we suspect that UNH could be facing a 'down year' in 2008.
"How things have changed."
Right after UnitedHealth issued its disappointing update, JPMorgan analyst William Georges downgraded the company's stock from overweight to neutral and urged investors to seek out stronger players in the group. Georges himself likes WellPoint.
Earlier this week, Georges predicted that WellPoint would beat -- and possibly exceed -- expectations for the third quarter. At the same time, however, he expressed some caution about the company's targets for the future.
"Though we expect WLP to stick with its 15% EPS growth outlook, we cannot rule out the possibility of sub-15% guidance with UNH opening the door last week," Georges wrote on Monday. But "note, too, that the market seems to expect this at current valuations."
Georges has an overweight rating on WellPoint's stock, which rose 57 cents to $79.26 on Tuesday. His firm has investment banking ties to UnitedHealth and WellPoint alike.
But Credit Suisse analyst Gregory Nersessian feels uneasy about WellPoint. Notably, he points out, WellPoint has weathered its own share of "brain drain" in recent years. Now, he stresses, three more WellPoint executives will soon follow 10 others out the door.
"The heads of WellPoint's main operating segments will be leaving, as will one of the chief architects of WellPoint's acquisition strategy," Nersessian wrote earlier this month. "While these defections do give new CEO Angela Braly the opportunity to handpick her leadership team, the loss of three senior executives -- each of whom was well regarded in the industry and on Wall Street -- increases the operational risk going forward."
Looking ahead, he added, "we continue to believe the stock will remain in a trading range until the management carousel stops and investors gain confidence that the ship is returning to calmer waters."
Nersessian has a neutral rating on WellPoint in the meantime. His firm has investment banking ties to the company.
At Aetna, some feel, the storm has already passed. After suffering serious damage years ago -- which cut its commercial health insurance business in half -- the company now seems to be flourishing in a tough industry environment.
Certainly, Perry sees Aetna as the brightest spot in today's managed care space.
"Over the past few years, Aetna has combined the discipline learned through the turnaround with product innovation to reposition the company for industry-leading growth," Perry wrote this month. "Aetna has come full circle and, in our view, is now better positioned to grow its commercial business over the next few years than any of its peers."
Thus, he concluded, "we think Aetna shares should trade at a premium to WellPoint and UnitedHealth" and rank the company as "our top large-cap pick" in the industry as a whole.