Oppenheimer is downgrading UnitedHealth Group (NYSE:UNH) to Underperform from Perform, and reducing their price target from $32 to $24.
Firm notes it's come to their attention that United is relying on a very aggressive Medicare bidding strategy in 2010 that will likely result in significant Medicare margin compression. United's bid assumes that physician costs will fall 21% next year, and that if a Medicare doctor payment fix occurs this year (likely), that plan reimbursement will be adjusted accordingly (very unlikely). Most other big Medicare plans in the industry are resigned to Medicare rates falling about 5% in 2010, versus an expected cost trend increase of 5%, and have reduced benefits accordingly. 2010 EPS projection is down $0.30, to $3.00.
If this goes against United, in a worst-case scenario, it will negatively impact operating earnings by almost $800 million, or $0.45 per share. Enrollment growth will offset a portion of this hit, but it will be difficult for United to show any meaningful EPS growth in 2010, even with a lot of share repurchase.
The issue here is timing. Congress isn't planning on passing health reform legislation until early September, which is probably aggressive. Either way, it will be far too late for CMS to adjust reimbursement, since the 2010 Medicare marketing season begins on October 1.
Therefore, 2010 will be United's third consecutive year of declining operating earnings, which will make it difficult for the company to sustain its industry-leading multiple, particularly since the market currently believes next year is when all of United's pieces will fall back into place. It doesn't appear that will be the case.
While the firm doesn't believe there is an enormous amount of downside to United's stock, as it already trades at less than 9x, they believe there are far more attractive opportunities in the group, like WellPoint, which will benefit from rising EPS projections over the next six months and trades at a lower multiple than UNH.
The implications for the other large Medicare plans in the industry are not positive. Because of this strategy, United will likely be offering far better benefits than most other plans, which will make it more difficult for competitors to grow and retain membership.
Notablecalls: UNH will likely get hit on this. why?
- First of all, it's a downgrade to Underperform. That always creates selling pressure. The stock is way up from its $16-$17 lows just 4 months ago.
- Cramerica has been all negative on the HMO's telling people to sell/short the whole group on heels of Obamas' healthcare reform. The downgrade validates his thesis.
- The chart kind of looks like the stock is headed lower here.
How low will it go?
This comes down to some math and gut feel. $0.30 in EPS x 9x estimate gives you $2.70 in potential valuation adjusted downside. Knowing UNH does not move that big I'm guessing $1.50-$2.00 is how much the stock will be down today.
Let's see how right or wrong I am with this one.
Firm notes it's come to their attention that United is relying on a very aggressive Medicare bidding strategy in 2010 that will likely result in significant Medicare margin compression. United's bid assumes that physician costs will fall 21% next year, and that if a Medicare doctor payment fix occurs this year (likely), that plan reimbursement will be adjusted accordingly (very unlikely). Most other big Medicare plans in the industry are resigned to Medicare rates falling about 5% in 2010, versus an expected cost trend increase of 5%, and have reduced benefits accordingly. 2010 EPS projection is down $0.30, to $3.00.
If this goes against United, in a worst-case scenario, it will negatively impact operating earnings by almost $800 million, or $0.45 per share. Enrollment growth will offset a portion of this hit, but it will be difficult for United to show any meaningful EPS growth in 2010, even with a lot of share repurchase.
The issue here is timing. Congress isn't planning on passing health reform legislation until early September, which is probably aggressive. Either way, it will be far too late for CMS to adjust reimbursement, since the 2010 Medicare marketing season begins on October 1.
Therefore, 2010 will be United's third consecutive year of declining operating earnings, which will make it difficult for the company to sustain its industry-leading multiple, particularly since the market currently believes next year is when all of United's pieces will fall back into place. It doesn't appear that will be the case.
While the firm doesn't believe there is an enormous amount of downside to United's stock, as it already trades at less than 9x, they believe there are far more attractive opportunities in the group, like WellPoint, which will benefit from rising EPS projections over the next six months and trades at a lower multiple than UNH.
The implications for the other large Medicare plans in the industry are not positive. Because of this strategy, United will likely be offering far better benefits than most other plans, which will make it more difficult for competitors to grow and retain membership.
Notablecalls: UNH will likely get hit on this. why?
- First of all, it's a downgrade to Underperform. That always creates selling pressure. The stock is way up from its $16-$17 lows just 4 months ago.
- Cramerica has been all negative on the HMO's telling people to sell/short the whole group on heels of Obamas' healthcare reform. The downgrade validates his thesis.
- The chart kind of looks like the stock is headed lower here.
How low will it go?
This comes down to some math and gut feel. $0.30 in EPS x 9x estimate gives you $2.70 in potential valuation adjusted downside. Knowing UNH does not move that big I'm guessing $1.50-$2.00 is how much the stock will be down today.
Let's see how right or wrong I am with this one.
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