UnitedHealth Looking Healthier
By Brian Orelli
July 24, 2008
Recommended (6)
Investors are downright giddy that UnitedHealth Group (NYSE: UNH) isn't quite as sick as it appeared earlier this month, when it slashed yearly guidance by as much as $0.60 per share. They've sent the stock up 16% since the health insurer released earnings on Tuesday. The news even dragged up fellow insurers Coventry Health Care (NYSE: CVH) and Cigna (NYSE: CI).
Revenue rose 7% year over year with the addition of 2 million members, but that's pretty much the only thing that improved over last year. The most troubling issue is the rising cost of health care. The company's medical care ratio -- the percent of premiums paid out for care -- jumped 2.9 points over last year to 83.2%. Combine the increased costs of paying for all of the doctor visits and lab tests with operating costs that were also up over last year, and there isn't a whole lot left to trickle down to the bottom line.
Adjusted earnings per share were just $0.67. That's down 25% compared with last year, but it beat the lowered guidance the company had given earlier in the month. As UnitedHealth continues to cut costs -- at least the ones it can control -- investors should be hopeful that it might beat its lowered guidance for the second half.
Right now, UnitedHealth trades at just 9.4 times the low end of its yearly guidance. That's slightly lower than Humana (NYSE: HUM) at 10.7 and the 10.2 times forward guidance that Aetna (NYSE: AET) sports. Investors are basically factoring in no growth for the health-insurance industry, and that just seems crazy to me, especially since the industry can adjust its prices every year to account for the higher medical costs.
Investors may have to wait a while to see the stellar growth return, but at these prices, the industry looks more like a value play than a value trap.
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