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Friday, March 30, 2007
United Health Care is healthy
A Health Company That's Healthy
UnitedHealth Group saw its shares plunge 3.5% after an investment bank cut its rating on the stock. The decline is an opportunity to snap up shares of one of the industry's healthiest stocks.
By Robert Walberg
Stocks rallied today. So why couldn't UnitedHealth Group (UNH, news, msgs) find a pulse?
The immediate reason was a downgrade by investment bank UBS, which lowered its rating on the stock to "neutral" from "buy" and cut its price target to $59 from $67. The stock fell 3.5% despite attempts to revive it by analysts at Citibank and Merrill Lynch, which both reiterated positive outlooks.
The question is whether there are bigger issues ailing one of the nation's leading health-care providers.
According to the UBS analyst, Justin Lake, UnitedHealth's commercial business is likely to remain sluggish this year as a drop in membership losses is offset by increased spending on patient care. The company also stands to lose if Congress cuts spending on the Medicare Advantage program, Lake said.
A quick reversal Yet UBS issued positive comments on UnitedHealth just three days ago, according to StreetAccount, an independent market research and analysis firm. At the time, it cited channel checks that indicated UnitedHealth was likely to retain a $5 billion AARP medical-supplement contract past this year. UBS then reiterated its "buy" rating and $67 price target.
It's not as if the tone in Congress, or the operating environment for the commercial business, took a 180-degree turn. So if you're left questioning the UBS report, or at least Lake's apparent lack of conviction, then there must be another reason for the stock's miserable performance.
One answer is that UnitedHealth was overextended after a 25% climb from its November low. By comparison, the S&P 500 Index ($INX) was up a mere 3.2%, and the Dow Jones Health Care Providers Index gained 21%. When you consider that UnitedHealth was also bumping up against its 52-week high, a pullback of even of 5% to 10% shouldn't be considered a big deal.
But this could be more than a simple case of backing and filling. UnitedHealth faces risks to performance -- or at least to expectations of performance. In the near term, the most pressing threat is to its proposed $2.6 billion acquisition of Sierra Health Services (SIE, news, msgs). Both the American Medical Association and Consumers for Health Care Choices have appealed to the Justice Department to block the merger due to concerns that "greater concentration means less competition." For example, the proposed merger would leave UnitedHealth with a 78% share of the Nevada market, according to the AMA.
Threat to merger could hurt When the deal was originally struck March 12, UnitedHealth announced that it expected the acquisition to immediately add about 4 cents to earnings, even before cutting costs. Any risk to the deal would force investors to rethink their earnings expectations.
Over the longer term, the company could take a modest hit to earnings if Congress were to cut spending on the Medicare Advantage program. Yet there are many things to consider before rushing to sell. First, Congress doesn't act swiftly. Second, if an adjustment happens, it will likely be much smaller than currently proposed. Finally, any adjustments to the program could easily be offset by the likelihood of broader coverage down the road if any of the leading Democratic presidential candidates have their way. Many states are already moving to expand coverage of uninsured -- a trend that will only benefit UnitedHealth and other leading health-maintenance organizations.
Though UnitedHealth could continue to back up over the very near term, toward support near $50, material declines at this juncture are unlikely, especially if the Sierra deal goes through -- and given the current tone in Washington, D.C., there's little reason to think it won't.
In fact, when you consider that the stock trades at a modest discount to projected long-term growth and that UnitedHealth's return on equity is among the best in the industry, investors might want to use the current price weakness as a buying opportunity. There's upside over the next 12 months to the $65-to-$66 range.
At the time of publication, Robert Walberg did not own or control shares of any company mentioned in this article, but his clients owned shares of UnitedHealth.