If you're big on the whole quarter-by-quarter earnings expectations game, you're not gonna like Universal American Financial
No sense beating 'round the bush: The fourth quarter was poor. Sure, revenue was up 17%, but net income got hammered by what management labeled as "spending for growth initiatives" and a more than $6 million reserve increase for the Medicare Supplement business. Unfortunately, adding back all of these "unusual" items still doesn't create a pretty picture; adjusted earnings are still slightly down relative to last year.
Dig a little deeper, though, and the story gets better. Yeah, the Senior Health Care segment was a mess due to the higher reserves (caused in part by higher-than-expected medical losses). But the Specialty Health, Life Insurance and Annuity, and Medicare Advantage businesses all delivered healthy double-digit pre-tax growth. And while the Administrative Services business broke even for the quarter, it grew 26% when you strip out costs relating to investing in the Medicare Part D business.
Interestingly, Universal American will be a much different company by the end of 2006 than it was in 2003 or 2004. Management saw that the market for the Supplement business wasn't looking so hot, so it decided to branch out into Medicare Advantage (where enrollment rose 11% this quarter) and Medicare Part D (where they expect to have 500,000 enrollees by year's end).
There's certainly plenty of competition. Humana
Valuing these shares today is tricky. After two straight disappointing quarters, metrics like trailing earnings and book value don't look so hot. Still, if the company can reach mid-teens growth for the next few years and achieve a normal valuation on those earnings, shareholders might yet see gains here.
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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).