Markets & Finance

UnitedHealth Gets a Chilly Reception


Investors sold the shares Thursday after the company said it posted strong earnings amid efforts to clean up its options-dating mess

UnitedHealth Group (UNH) took another step in its battle to clean up its stock options mess on Jan. 18, when the Minneapolis health insurer announced its fourth quarter profit and sales. But investors sold the stock after the news.

The company is in the middle of recovering from a stock option scandal, after having ousted its founder and former CEO Dr. William McGuire in recent months. UnitedHealth also warned its investors last fall not to rely on its historical statements about the past dozen years' financial results. The company expects to take "significantly greater" charges than $286 million related to its mis-accounting of options.

Now UnitedHealth finally said Jan. 18 that its earnings rose to $1.2 billion during the three months ended Dec. 31 and its full year net earnings increased to $4.174 billion. With no reliable historical financial statement to compare those numbers against, it's hard to know how much the company's earnings have grown over last year's.

But UnitedHealth's new CEO Stephen Hemsley -- who previously served as COO and has been with the company since 1997 -- was upbeat about the more current results he just provided. "We concluded 2006 with a strong earnings performance," Hemsley said in a press release. He says his company, which provided services to a total of more than 4.7 million new people in 2006, had balanced growth and earnings contributions across its various and sundry businesses.

Nonetheless, UnitedHealth's fourth quarter sales were a little disappointing to some analyst forecasts. The company's December quarter revenue amounted to $18.16 billion. That's below the mean analyst forecast of $18.23 billion, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial.

Investors reacted by selling the stock 3.1% to $53.93 per share in early trading on the New York Stock Exchange.

"UnitedHealth Group, importantly, is a highly adaptive enterprise well-positioned for the future and the changes in the health care environment that are ahead," Hemsley said in the press release.

For example Medicare Part D, which started on January 1, 2006, is a federal program that subsidizes prescription drugs. (UnitedHealth has a market leadership position in Medicare Part D, according to Morningstar.) The company's fourth quarter operating margin of 9.2% benefited from the strong quarterly performance of the Medicare Part D business. Its overall margin in 2006 was "moderated by business mix changes" related to Medicare Part D and the recent acquisition of PacifiCare Health Systems, UnitedHealth said.

Hemsley has also had to adapt to the tough regulatory environment on stock option accounting. News hit in November that he agreed to have his options from 1997 and 2002 reset to the highest share price in the year in which they were granted. He also said he'd give up gains from options that were suspended in 1999 and reinstituted in August, 2000. The decision cuts the value of his options by $190 million.

The options backdating scandal has snared more than 120 companies to date, many of which will need to restate results to account for the compensation expense and pay taxes for options that were mishandled. The practice of backdating, which is allowed under accounting rules as long as it's disclosed, allows the recipient of a stock option to snag an immediate paper gain, since the strike price is set below the current share price.

Standard & Poor's equity analyst Phillip Seligman maintained his bullish stance on the shares -- and raised his 12-month target price by $5 to $65 -- in a Jan. 18 research note. "[W]e are encouraged by strong organic revenue growth and cost control, and by healthy enrollment growth in all products except risk-based commercial and Medicare Advantage," he said. Seligman also has a positive view of the company's moves to improve corporate governance. (S&P, like BusinessWeek.com, is a unit of The McGraw-Hill Cos.)


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