UnitedHealth Looks Like Dead Money

4/23 - "For the full year 2008: membership is expected to decrease by 700K, the medical loss ratio is expected to increase from 80.6% to 81.3%, and the earnings outlook dropped 10%. United has become a no-growth company and the term “cost containment” no longer applies...United’s fee based business is the only bright spot, be it the least profitable. United is willing to incur membership losses to maintain earnings in its more profitable risk based business...But customers are starting to push back."

"I do not believe that United’s business model is sustainable. The higher profit risk based business will continue to fall. Its market will slowly disappear. The fee based business margins will continue to shrink if they are no longer truly providing cost containment. Administrative services can be provided by anyone. I know this is an over simplification, but the trend is clear."

"Politically the health insurance industry is at a cross road. The clientele for the current model is falling. Despite the “free market” mantra, insurers are becoming more dependent on the government for their profits. The industry may actually need an all inclusive business model to survive."

4/23 - "UnitedHealth Group’s 1Q08 performance was generally in line with vastly lowered expectations but its outlook was less than encouraging. While medical cost trends were in line with our expectations, worse-than-expected enrollment attrition took its toll. The company cited a softening economy as a contributing factor to the miss as well as its own underperformance. First quarter’s result may not have reflected the level of improvement expected by the Street, but we do not believe the punishment fit the crime. We have slashed our estimates to reflect the bleak short-term outlook, but we remain optimistic that current valuation does not reflect the embedded earnings power of UNH."

"Excluding mergers and acquisitions, our current EPS estimates for UNH are $3.43 for 2008 and $3.78 for 2009. This represents 1.7% EPS contraction this year and 10% growth in 2009...UNH shares currently trade at approximately 9.0x our 2009 EPS estimate of $3.78. We now believe the shares merit a forward P/E of 11.1x as earnings growth should return late this year, producing a price target of $42. The target multiple is at the low end of UNH’s historical range; however, we believe the near-term earnings outlook is also in that range.'

"We are maintaining our OUTPERFORM rating, based on below trough valuations and lower expectations."