UnitedHealth ( UNH) sank 4% early Thursday after the giant health insurer continues to struggle with a stock-option backdating scandal. The Minnetonka, Minn., company posted generally in-line fourth-quarter numbers but said an earnings restatement would limit the amount of financial data it could share. The news comes after a year that saw the company's longtime CEO, William McGuire, forced out by revelations that he oversaw a program that gave workers stock options at favorable terms while neglecting to properly account for those perks. The company made $1.2 billion in the quarter ended Dec. 31 on revenue of $18.16 billion but said it couldn't offer year-to-year comparisons or per-share numbers as it grapples with its stock-option accounting. Using numbers the company furnished, though, it appears UnitedHealth made 86 cents a share for the quarter, a penny ahead of the Wall Street estimate. Looking ahead, the company expects to follow through on its promise to deliver profits of $4.7 billion to $4.75 billion for the entire year. Sheryl Skolnick, senior vice president of CRT Capital Group, likes what she sees. The results were "very solid, very much in line," Skolnick says. "The trends were good. They were what they should have been." A $50 million charge for stock-option expenses did hurt the bottom line, however. The company's review of past option grants, which could bring massive restatements, is ongoing. Shares were falling $2.08 to $53.57.
Despite scandal-related headlines, UnitedHealth continues to add new customers -- especially in Medicare and consumer-directed health care (CDHC) plans -- while keeping its medical costs under control. UnitedHealth's all-important medical cost ratio did tick up from a year ago, which can sometimes cause concern, but the company offered a reassuring explanation. For one thing, UnitedHealth realized a lower level of favorable period developments than it did a year ago. For another -- and for the first time -- the company felt a meaningful impact from the growing shift toward consumer-directed plans. The company saw many customers meet their high deductibles on those plans in the fourth quarter. As a result, those customers qualified for coverage that raised the company's medical costs as the year drew to an end. "That's reflecting a seasonality we haven't seen before," says Skolnick. "Now high-deductible health plans are material; last year they weren't." UnitedHealth's Medicare Part D offerings helped out in the fourth quarter, however. Part D turned a profit during the period, Skolnick notes, rewarding the company for its huge investment in the plans. Now, Skolnick is simply waiting for some concrete answers about the company's stock-option problems. She wants to know just how much its backdated options will cost before she updates her fair value rating on the company.
Loyal FansCitigroup analyst Charles Boorady has never lost faith in UnitedHealth despite its rocky patch. "The volatility in UNH stock early in 2006 was much higher than normal and was a surprise," Boorady explained last week. "However, we continue to assign a low-risk rating to UNH because we believe the recent high volatility was due to unexpected and unusual events such as a stock-option probe and investor rotation out of health care and into other sectors." Boorady has, in fact, named UnitedHealth his top stock pick for 2007. Meanwhile, he recently predicted that UnitedHealth would meet Wall Street targets for the fourth quarter and reiterate its robust guidance for the coming year. As always, he figured, investors would listen closely to those calls. "All eyes are generally on UnitedHealth because it is among the largest and most diverse companies in the sector," wrote Boorady, whose firm counts the company among its clients. "It is the first to report quarterly earnings, (and its) comments on medical cost trends could impact other sectors of healthcare." Medical cost trends stand out as a crucial metric for health insurers and hospital companies alike. A sudden spike in medical costs hammered shares of Aetna ( AET) a couple of times last year. But the industry has enjoyed moderating medical costs, for the most part, and even Aetna has recovered from its recent setbacks.
Boorady, for one, expects that favorable trend to continue -- but at the expense of hospital companies hurt by patient bills that are no longer covered by insurance. "We will be looking for decelerating medical cost trends due to higher deductibles and co-insurance," Boorady noted. Moreover, "we expect deceleration to continue through 2010, as high-deductible health plans coupled with health savings accounts gain rapid adoption in that timeframe." Thanks to acquisitions, UnitedHealth ranks as the largest player in the CDHC business. Aetna, a pioneer of CDHC plans, is a major player as well. UnitedHealth also stands out as a leading heavyweight in the Medicare Part D game. Boorady likes the company, in part, for that very reason. Of course, some people fear that Medicare Part D -- attacked by Democrats during last fall's elections -- could face major changes going forward. But others have started to downplay those risks. "Although it proved to be a popular talking point during the elections, we expect Part D reform driven by Democrats will be limited and mostly cosmetic in nature," Piper Jaffray analyst Melissa Mullikin wrote on Tuesday. "Given that the program has come in well under initial cost estimates and that it enjoys substantial popularity among beneficiaries, we do not expect the government to enact any sweeping changes that would disrupt the program -- or UNH's role in it -- in the near term." Indeed, Mullikin foresees a solid year for UnitedHealth overall. "We expect fundamental performance to continue and negative options headlines to grow more infrequent," she wrote. "As a result, we believe the stock is well positioned for multiple expansion in 2007, as the company continues to outpace its competitors in terms of new product introductions without the 'options monkey' on its back." Mullikin has an outperform rating and a $60 price target on UnitedHealth's stock. Her firm has investment banking ties to the company.