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AIS's Health Business Daily
Featured Story August 1, 2008 Health Plan Stocks End Second Quarter Bloodied, After a Painful First Quarter Reprinted from HEALTH PLAN WEEK, the industry's leading source of business, financial and regulatory news of health plans, PPOs and POS plans. By Steve Davis, Managing Editor (sdavis@aispub.com) After a painful first quarter, health plan stocks took another drubbing on Wall Street in the second quarter of the year. Some equities analysts contacted by HPW, however, say health care stocks could be a bargain for patient investors, and are optimistic the stocks will rebound in 2009. Other analysts suggest that the industry could be in the early stages of a prolonged downturn as an increasing number of employers reduce or eliminate coverage. While the Standard & Poor's 500 stock index ended the second quarter down nearly 13% from the beginning of the year, managed care stocks fared far worse. UnitedHealth Group, for example, saw the price of its stock plummet by 55% since the beginning of the year, and by 23% since May, according to Banc of America Securities, LLC. Universal American Corp.'s stock price fell 60% from Jan. 1 levels, and Health Net, Inc.'s stock dropped by more than 50% during the same period. And managed care stocks slid even further July 10 after the Senate passed a bill that would reduce payments for Medicare Advantage (MA) plans. Among health plans that sell MA and stand-alone Medicare Prescription Drug Plans (PDPs), two-thirds have lower stock prices than they did when they launched their MA products, and all of them have seen stock prices fall since launching PDP products, according to Robert Laszewski, president of Health Policy and Strategy Associates, a policy and market consulting firm. More Revisions Are Possible On July 2, United, as expected, cut its 2008 earnings outlook for the second time in just six months. The company projected adjusted earnings for full year 2008 would be in the range of $2.95 to $3.05 per share on revenues of about $81 billion. The company previously projected earnings of $3.55 to $3.60 per share. Some industry observers say other health plans could follow suit when they release their second-quarter results later this month. Equities analysts agree that United is unlikely to make any further changes when it announces earnings July 22. "The latest revised outlook from United, while negative for the share price, will not, in our opinion, be as dramatic as [WellPoint, Inc.'s] surprise revision of a few months ago," adds Chris Kallos, senior health care industry analyst with Zacks Investment Research. Thomas Carroll, an equities analyst with Stifel Nicolaus, says the sector is unlikely to see any other "significant" downward revisions when health plans report their second-quarter earnings, but adds that Health Net "is always a wild card." Matthew Coffina, an equities analyst with Morningstar, Inc., agrees that United isn't likely to revise its outlook further this month, but says investors will be paying close attention to WellPoint, which has lowered its earnings projections twice this year. In the absence of further downward revisions, Kallos says health plan stocks have "limited room" to drop any further. However, reduced reimbursement to MA plans, he admits, could have a profound financial impact on United and Humana Inc., the two largest players in the MA space. Are Health Plan Stocks a Bargain? Coffina says health plan stocks are "significantly undervalued" and could be a bargain for patient investors. Stock-price levels, he predicts, will move significantly higher over the next two years. Despite United's recent revised outlook, its stock continues to trade at "almost unheard of [price-to-earnings] valuations of eight-times earnings," he says. Health plan stocks in general, he adds, are "extremely cheap." But he notes that the struggling economy could continue to have a negative effect on health plans as employers reduce or eliminate employee health coverage. "We might be reaching a tipping point where it's not worth it for employers to offer health coverage," Coffina says. Carroll suggests that current expectations for 2009 "seem a bit rosy to us." He cites the average earnings-per-share decline from 2007 to the current consensus 2008 numbers of -4.7% and an average estimated EPS growth for 2009 of 16.5%. The inability to meet those expectations, he adds, could further pressure health plan stocks. He says the ideal entry point for investors will likely be between the third quarter of 2008 and the first quarter of 2009. Matthew Borsch, an equities analyst at Goldman Sachs, says the market reflects cyclical trends and adds that investors are reacting to the end of a period of enormous growth during the first half of the decade. He projected profit margins would continue to drop beyond 2008. "The market is now looking at declining earnings and is also worried about stormy clouds on the Medicare horizon," he said at a recent conference in Washington, D.C. On July 2, the same day United revised its earnings forecast, the company unveiled plans to reduce its work force by 5% and said it had agreed to pay $895 million into a fund to settle a class-action suit with the California Public Employees' Retirement System (CalPERS). As part of the proposed settlement, neither the company nor any of the individuals involved admit wrongdoing. The settlement is subject to approval by the CalPERS board of administration, United's board of directors and the court. The lawsuit, filed in December 2006 in the U.S. District Court for the District of Minnesota, alleged discrepancies among United's public statements about its profits, which were related to stock-option grants to executives. CalPERS and several other investors sued the company after news reports focusing on the alleged practice of allowing executives to set their stock purchase dates when share values were low, and then selling them later when they were high. CalPERS says it holds 4.9 million shares of United stock. United also said
July 2 that it had reached an agreement in principle to resolve Employee
Retirement Income Security Act (ERISA) class-action litigation relating
to its historical stock-options practices. That suit was filed in June
2006 in the U.S. District Court in Minnesota against the company and
some current and former officers and directors. Under the terms of the
proposed settlement, United will pay $17 million into a settlement fund
for the benefit of class members; most of that amount will be paid by
the company's insurance carriers, according to a prepared statement
from United. |
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