Better Thing Yet to Come for UnitedHealth; Maintaining Outperform

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."