$20 billion-plus Evaporates in HMO Rout
WellPoint’s (WLP-NYSE) last minute cancellation from a conference yesterday had the rumor mill spinning tales of a Humana takeout.
Just another off-base rumor:
WellPoint Inc may have just shot down any investor hopes that U.S. health insurers could be a safe place to put their money in a troubled economy.
Shares of WellPoint tumbled as much as 27.6 percent on Tuesday after the largest U.S. health insurer by membership slashed its 2008 profit forecast, citing high medical costs, weak enrollment and a worsening economy. Reuters
The HMO’s are shedding roughly $20 billion in market cap today, which will mean not everyone will get to enjoy the rally in the broader market. Goldman is belatedly barring the door, and adding to the shareholders pain in this stock and the group:
Following a lower 2008 earnings outlook from WellPoint, we downgrade our coverage view of managed care to Neutral from Attractive. We also downgrade WellPoint stock to Neutral from Buy. Since adding WellPoint to the Americas Buy List on 1/5/07, shares are down 16% versus a 10% decline in the S&P 500 (down 16% versus 9% in last 12 months). We have also revised our EPS and price targets downward across the group.
More than a “company-specific” problem WellPoint’s problems reflect company-specific underwriting error, but also reflect industry-wide pricing pressures that are now combined with upward pressure on underlying medical cost trends, substantially increasing the risk that the current cyclical slowdown in managed care becomes an outright downturn.
Currently low valuations help to limit our coverage view downgrade to Neutral (i.e., rather than Cautious), while our lower-but-still-positive EPS growth projections reflect the positive structural changes in the industry (consolidation, etc.) that should mitigate margin downside. However, we flag the risk that P/E-based valuation may obscure the downside potential in a cyclical industry. Meanwhile, we see more potential downside than upside risk to our new EPS. We have also lowered price targets across the group.
CIGNA remains our favorite. On a sector-relative basis, the developments at WellPoint strengthen our conviction in Buy-rated CIGNA, which has the least earnings exposure to the price-sensitive (and historically cyclical) commercial risk business, as well as the lowest valuation in the group on a 2009 P/E basis. The reason for this is that a much greater proportion of CIGNA’s earnings are driven from
fee-based arrangements with large to mid-sized employers that self-insure their underwriting risk. Goldman Sachs
This pain is being shared equally around the BuySide, but that does not make if any easier to swallow. Goldman certainly did not see this coming, and while the firm is exceptional in many ways, their equity research effort is not.
WellPoint warning may long haunt HMO stocks
Reuters
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Positions
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