Q. I am concerned about my shares of UnitedHealth Group, which used to be the greatest. Will its problems hurt its stock further?
K.R., via the Internet
A. You’re not alone. Many shareholders of the large health insurer are feeling under the weather right now.
UnitedHealth Group (UNH) shares are down 18 percent this year, a turnaround from robust gains of 41 percent last year, 51 percent in 2004 and 39 percent in 2003.
Profits were up 26 percent in the firm’s most recently reported quarter, thanks in large part to its acquisition of PacifiCare Health Systems. Another boost came from the start-up of the federal government’s Medicare Part D prescription drug coverage designed to help senior citizens pay for prescription medications.
UnitedHealth said it not only will earn more than initially projected this year, but should do even better in 2007.
But there’s a bitter pill for investors:
The firm delayed filing its second-quarter Form 10-Q with the Securities and Exchange Commission because of its ongoing review of past option grants. In a high-visibility probe, government investigators have been looking into whether it improperly backdated options given to Chairman and Chief Executive William McGuire and other top executives. The company’s internal investigation determined it may have to restate up to $286 million in net income from the past three years.
Fitch Ratings recently placed UnitedHealth debt on “rating watch negative,” citing the firm’s disclosure to the SEC that it received a notice of default from some debtholders, who said it violated its debt-handling responsibilities. The company responded that it “believes it is not in default and intends to defend itself vigorously.”
Fitch did point out that UnitedHealth’s operating fundamentals and ability to refinance remain strong. The company boasts a customer base that spans many regions and industries, a simplified administrative process, and a decade of strong returns on invested capital.
Balancing promising growth against the options scandal, opinions diverge on the discounted shares of UnitedHealth. According to Thomson Financial, analyst opinions consist of seven “strong buys,” nine “buys,” five “holds” and one “sell.”
Earnings are expected to increase 19 percent this year versus 9 percent forecast for the health-care plan industry. Next year’s projected 16 percent increase compares to 15 percent expected industrywide. Its five-year annualized growth rate is pegged at 17 percent versus 15 percent for its peers.
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Finally, a federal judge recently ended seven years of litigation by dismissing all remaining claims against the company in a class-action suit involving 700,000 U.S. physicians who claimed it had unfairly cut their reimbursements.
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Andrew Leckey is a Tribune Media Services columnist. E-mail him at [email protected].