United Healthcare reported earnings 13 cts ahead of consensus ($0.81 vs. $0.68) on Tuesday am. However the company maintained full year EPS guidance of $2.90-$3.15, thereby implying that quarterly eps for each of the remaining three quarters this year would be lower than consensus. This, I think, is why the stock ended the week down 5%. Likewise, Wellpoint, THE largest managed care company (I had earlier written UNH was), also beat earnings this week but guided to lower targets for teh remainder of 2009, and it finished 2.5% lower on the week. Overall, the op mgns of 7.6% weren't the greatest (they've been 100-200bps higher in the past), but it appears there could be room for improvement. Both UNH and WLP suggested that the medical loss ratio (percentage of premium revenue spent on medical care) would rise in the coming quarters as members on high deductible plans work through their deductibles and the costs for the companies begin to rise. Nonetheless, using $3 in 09 eps, the stock continues to trade at just over 7x p/e ratio, well below historical norms (see the graph previously posted). We believe the low multiples are a result of market concerns over healthcare policy and we are comfortable making the bet that (1)profitbaility is stable and may eventually improve and (2) large managed care players like UNH are more part of the solution than part of the problem in addressing the healthcare needs of the United States.
Microsoft also reported in-line numbers this week. The stock reacted positively to cost control initiatives which could help drive profitability in future quarters. The company has a fiscal year end in the June quarter. MSFT's 2009 eps estimate is $1.72, compared to $1.86 in FY08. Consensus for FY10 is $1.84. Assuming flat (ie, 12cts lower than consensus) FY10 eps of $1.72, MSFT presently trades at 12.2x p/e, compared to 14.9x (866/$58) for the S&P500. Considering the proftiability of MSFT's business model (30%+ op mgns) and stable revenue outlook (supported by upcoming releases of Windows 7, Office 10 and other products), we believe it makes sense to continue to own MSFT here. Considering we initiated the position slightly higher than $16/sh and are now up 25% on the position, we do ask ourselves at what point we'd sell. So far our answer is: at a slight discount (14x) to the SPX: 14x p/e on $1.72 (flat eps) = $24.08.
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