UnitedHealth (NYSE: UNH ) insurers the health of others, but now its shares seem terribly ill. A dismal start to 2008 sent shares tumbling, and the news keeps getting worse and worse.
UnitedHealth's first-quarter results came in below expectations, sending shares tumbling more than 10%, to the lowest levels seen since 2004. Net income for the quarter nudged up to $994 million, or $0.78 per share, from $927 million, or $0.66 per share in the first quarter of 2007. While the results produced an 18.1% increase in net income per share, analysts had been looking for $0.80 per share for the quarter. Revenue climbed 6.6% to $20.3 billion.
Was it really that bad?
Amid a market drowning in low expectations, the results might not seem as dismal as the market perceived them. With an economy on the verge of a recession, lower results should be expected from a wide swath of industries, including health-insurance providers. So what gives?
For one, UnitedHealth's results disappointed on many levels. The commercial cost ratio grew to 81.5%, above the expected 80.5%. In what might be a sign of an ugly employment market, 700,000 commercial plan members are expected to jump ship during the year, excluding those gained from acquisitions. More to the point for investors, 2008 earnings guidance was slashed by $0.40 per share, pushing full-year expectations down to between $3.55 per share and $3.60 per share in net income.
Is the worst over?
With Tuesday's plunge, UnitedHealth now trades at less than 10 times estimated 2008 earnings, about on par with competitors Aetna (NYSE: AET ) , WellPoint (NYSE: WLP ) , and Cigna (NYSE: CI ) . Coming from an industry that functions as a necessity for millions who rely on health care -- especially with an aging baby-boomer population -- less than 10 times earnings might look like one heck of a bargain.
But before jumping headfirst into health insurers like UnitedHealth, Fools should note a few details. First, the health insurance industry has become fiercely competitive in a rising cost environment, a partial factor to UnitedHealth's rapidly shrinking operating profit margins over the past two years: from 10.9% last quarter, to 8.4% this quarter.
Another thorn in health insurers' side could come from the upcoming presidential election. Some candidates propose health-care measures that many believe could have a crimp health insurers' bottom lines. While the reality and details of such programs aren't fully clarified yet, the uncertainty alone could cause investors to head for the exits.
But do those factors really justify UnitedHealth's recent share plunge? This Fool doesn't think so. While future headwinds might make results a bit bumpy, UnitedHealth is still a stellar company trading a rock-bottom price.
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