Answers.
Everybody wants 'em -- especially when a much-loved stock takes a bit of a slide. So, when Stock Advisor recommendation UnitedHealth (NYSE: UNH) started selling off, analysts dutifully came forward with "explanations." Some said the decline was due to concerns about the company's stock options policy, others said it was concerns about merger integration, and still others worried about what greater transparency in the industry might mean.
Hogwash.
If there was any good reason for the stock to decline (and like it or not, the stocks of even great companies occasionally decline), it was because the stock was expensive.
Although the presentation of first-quarter results was a little quirky, UnitedHealth continues to perform exceedingly well. While certainly boosted by the acquisition of PacifiCare, revenue was exceptionally strong -- up more than 57% on a reported basis. Operating earnings were likewise very strong (up more than 24%), and the company continues to generate exceptional cash flow.
It should be noted that UnitedHealth is now presenting earnings in two ways -- a regular generally accepted accounting principles method and a method that normalizes the impact of Medicare Part D on earnings. I'm sticking with GAAP numbers here mostly because there isn't space to discuss both, but investors should be aware of both sets of numbers.
Other basic metrics of this business also seem to be maintaining strength. While the medical cost ratio was up a little bit this quarter (up is bad), it would have been down had PacifiCare and Part D not been included. Elsewhere, enrollment looked very solid (and the company boosted its full-year guidance), and the company raised premiums for the year at a rate above last year's cost trends.
There are some concerns out there about UnitedHealth and the sector, but I think they're more noise than real issues. Reports that the National Health Access program hasn't experienced a roaring start may be true, but it's certainly not crippling the performance of UnitedHealth (nor will it for Humana (NYSE: HUM) or CIGNA (NYSE: CI)). Likewise, the stock options issue may lead to some necessary reforms and a bit of embarrassment, but I have a hard time believing that the company really did anything seriously wrong.
Even with the year-to-date decline in the stock, it's still not at a level where I'm going to be a buyer. I personally preferred the stock of rival WellPoint (NYSE: WLP) a quarter ago and I still do today, though we have yet to see its first-quarter earnings. While I'm not saying that UnitedHealth isn't a great company, I just prefer to buy when I have that margin of safety working in my favor.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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