Sector Wrap: UnitedHealth drags health care stocks

UnitedHealth cut its profit and revenue forecast Wednesday, and also said it will eliminate at least 4,000 jobs. The company said intense competition has lead to lower premium yields, while Medicare-related costs have increased and corporate business is down.

It now expects to earn $2.95 to $3 per share this year on $81 billion in revenue. The company once expected a profit of as much as $4 per share in 2008, with $83 billion in revenue.

The health insurance sector gained early Wednesday as analysts said UnitedHealth's woes didn't signal any new issues--a relief because several health insurers have reduced their forecasts in recent months. But shares of UnitedHealth and a few other stocks declined later in the session, and by Thursday morning, UnitedHealth stock was trading at its lowest price since May 2003.

The Minnetonka, Minn., company's shares lost $2.16, or 8.6 percent, to close Thursday's abbreviated session at $22.96, having earlier reached a low of $22.72.

Credit Suisse analyst Gregory Nersessian said questions about UnitedHealth's 2009 growth prospects weighed on the stock. UBS analyst Justin Lake downgraded UnitedHealth to "Neutral" from "Buy" for the same reason.

"We find little in management's commentary to indicate the worst is behind it," Lake said. He slashed his price target to $28 per share from $40, saying UnitedHealth's business will struggle because of difficult competition, higher medical costs, and a lack of relationships with customers, which will make it harder to gain new business.

Lake also thinks UnitedHealth will lose 539,000 members in 2009, and its medical loss ratio--a measurement of the proportion of premium dollars spent on medical care--will get worse.

Lehman Brothers analyst Joshua Raskin was modestly more optimistic, saying profit will grow to $3.20 per share in 2009 from $3 per share in 2008 because because of the company's stock buyback, and gains in fee-based commercial and Medicaid enrollment.

However, Raskin cut his price target to $35 per share from $42, and said "The year 2008 will go down as one of the most disappointing years in the company's history, and the most challenging since 1998."