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Health stocks take a beating
Medical costs rose this winter. Was it because of a particularly heavy flu season, or does it signal a trend that will hurt UnitedHealth Group?
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Shares of UnitedHealth Group were battered Tuesday amid growing concerns over the bottom-line impact of rising medical costs and shaky enrollment trends among the largest health insurers.
The company's stock, which hit a 52-week high of $58.99 on Dec. 21, fell 15.2 percent Tuesday to close at $38.24.
The selloff was part of a larger thrashing of the health insurance sector, a move that was more pronounced given that most stocks rallied strongly Tuesday as the Federal Reserve announced a new effort to boost liquidity in the credit markets.
The catalyst for the selling was WellPoint Inc., the nation's second-largest health insurer, which reduced its profit outlook for 2008 late Monday. Its shares plummeted 28.3 percent Tuesday, closing down $18.66 at $47.26.
"If you listen to the market, this is pretty serious," said Sheryl Skolnick, an analyst with CRT Capital Group.
"Guess what got higher than expected? Cost. Now we have to see if this was because of the flu season or if it's a trend."
Bear Stearns analyst John Rex downgraded the entire sector from overweight to market weight based on WellPoint's announcement. Rex also lowered his price target for UnitedHealth from $60 a share to $49.
"We already had some tough headwinds in '08, what with political fears, investment portfolio suspicions, flu and falling state program funding," Rex said in a report to investors. "WellPoint opened up what we consider to be the ultimate managed care earnings fear: rising medical costs."
But Doug Simpson at Merrill Lynch maintained his price objective for UnitedHealth at $64, in part because of the Minnetonka-based insurer's "historically strong cash flow."
UnitedHealth as a rule does not offer earnings guidance in the middle of a quarter but three weeks ago, at the closing of its acquisition of Sierra Health Services, the company said it "continues to project" year-end revenue of $83 billion and earnings of $3.94 to $4 per share.
Skolnick said UnitedHealth and WellPoint also have an issue with sagging enrollment, as well as medical costs, that must be confronted.
"It's a pretty competitive market and WellPoint and United are not winning it," Skolnick said. "For one thing, they're losing [policies] ... and the ones they're retaining are sick. That's a recipe for excruciating pain for both investors and health plans."
An isolated problem?
Thrivent's David Heupel said WellPoint mispriced its insurance products, causing earnings to be squeezed by higher medical costs. He noted that Aetna Inc. is coming out with an earnings report on Friday and reaffirmed its earnings forecast Tuesday.
"The real question is, is the [upside] cycle over?'' Heupel asked.
In a conference call with analysts less than two months ago, UnitedHealth CEO Stephen Hemsley said, "We have a significantly more powerful sense of momentum than we had at this time last year."
A day after UnitedHealth's Jan. 22 session with Wall Street, WellPoint chief executive Angela Braly told analysts that "We're feeling pretty good about '08."
Asked about those January assessments, Skolnick, the CRT Capital Group analyst, said "Management's job is to be upbeat."
David Phelps • 612-673-7269
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