More Profit Downgrades

Healthcare has been one of those sectors of the US economy that has been recommended by all and sundry on Wall Street as a place to safely park your money during the current/coming recession.

Healthcare is afterall a booming industry in an ageing population expecting an explosion in health care services as the baby boomers start to retire on mass. Sounds like a nice idea, however despite these tail winds it seems some health insurers are having a tough time of it. From marketwatch.com:

Health insurers take a dive on WellPoint's warning
Carrier cuts full-year outlook by more than 40 cents; brokers cut ratings

Health insurers plunged Tuesday after WellPoint Inc. officials warned the company would have to cut its profit forecast for the first quarter and all of 2008, and then they watched the company's shares lose more than a quarter of their value.

WellPoint (WLP) tumbled by more than 28% to $47.26 at the close after the Indianapolis-based carrier cut its full-year earnings forecast to a range of $5.76 to $6.01 a share, including investment gains of 6 cents, from its previous forecast of $6.41 a share. Its previous forecast was in line with expectations from analysts polled by FactSet Research.

The company also projected a first-quarter profit of $1.16 to $1.26 a share, including 6 cents a share in net realized investment gains. Its prior forecast was for $1.44 a share. Wall Street was looking for earnings of $1.44 a share for the quarter.

"We are making these revisions to our prior earnings guidance due to higher than expected medical costs, lower than expected fully insured enrollment and, to a lesser extent, the changing economic environment in which we are operating," Chief Executive Angela F. Braly said in a press release

WellPoint was hit with a slew of ratings cuts, and the news shook the rest of the health insurance industry. Virtually all other carriers saw double-digit losses.

Interesting that fully insured enrollment numbers are not living up to expectations. Could it be that the ever escalating costs of healthcare in the US have something to do with that? As usual the analysts are behind the curve:

A number of brokers cut their ratings on WellPoint, including JP Morgan, Bear Stearns, Stifel Nicolaus and Goldman Sachs. Goldman Sachs' analyst Matthew Borsch not only cut WellPoint's rating to neutral from buy, it also scaled back its view on managed care to neutral from attractive.

"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," Borsch wrote in a note to clients.

Other analysts said they were taken aback by the news. "We are shocked by this revision considering the level of confidence with which management spoke as recently as Feb. 13, 2008," Stifel Nicolaus analyst Thomas Carroll said in a note Tuesday. "WellPoint has been exceedingly confident and seemingly conservative in communicating its 2008 outlook in the last three months."

Carroll cut his rating on WellPoint to hold from buy.

While other analysts predicted the rest of the sector would be dragged down, they said WellPoint's problems are not likely to impact other insurers. "The company took responsibility for price inaccuracy and has taken several actions to correct its missteps," David Shove, analyst for BMO Capital Markets, said in a note to clients. "We believe that WellPoint's fumble is company specific, and not indicative of an industry trend."

Phew thanks for that reassurance that it's not an industry wide issue David....wait a minute what's this?

Humana Cuts 1st Quarter, 2008 EPS Views On Higher Claims Volumes

Humana Inc. (HUM) cut its first-quarter and full-year 2008 earnings guidance due to updated projections for its 2008 stand-alone PDP financial performance. News of the guidance revisions sent Humana shares lower by 24% in premarket trading to $36. Humana shares closed down $15.32, or 24%, Tuesday at $47.38, after a reduced earnings estimate by Wellpoint (WLP) dragged the health insurers sector lower. The company cut its first-quarter earnings guidance to a range of 44 cents to 46 cents a share from its prior estimate of 80 cents to 85 cents a share. For 2008, Humana now sees earnings of $4 to $4.25 a share, down from its previous guidance of $5.35 to $5.55 a share. Human cited higher-than-anticipated claims volumes for the company's stand-alone PDPs for the updated projections to its PDP financial performance.

For what it's worth, I agree with Mr Shore, it's not an industry wide issue, it's an economy wide issue.

If I'm starting to sound like a broken record on earnings expectations, it's because it's very important. Earnings are the lifeblood of stock prices over the long term.

A common line we hear these days from mainstream media and Wall Street analysts is that a recession is already priced in to stock prices. However that is doubtful since the forecasts for most sectors do not yet reflect anything approaching recession type earnings.