UnitedHealth cooled by scandal

Your Money

September 10, 2006|By Andrew Leckey | Andrew Leckey,Tribune Media services

I am concerned about my shares of UnitedHealth Group, which used to be the greatest. Will its problems hurt its stock further?

- K.R., via the Internet

You're not alone. Many shareholders of the large health insurer are feeling under the weather right now.

UnitedHealth Group (UNH) shares are down 18 percent this year, a turnaround from robust gains of 41 percent last year, 51 percent in 2004 and 39 percent in 2003.

Profits were up 26 percent in the firm's most recently reported quarter, thanks in large part to its acquisition of PacifiCare Health Systems. Another boost came from the startup of the federal government's Medicare Part D prescription drug coverage designed to help senior citizens pay for prescription medications.

UnitedHealth said it not only will earn more than initially projected this year, but should do even better in 2007.

But there's a bitter pill for investors:

The firm delayed filing its second-quarter Form 10-Q with the Securities and Exchange Commission because of its ongoing review of past option grants. In a high-visibility probe, government investigators have been looking into whether it improperly backdated options given to Chairman and Chief Executive William McGuire and other top executives. The company's internal investigation determined it may have to restate up to $286 million in net income from the past three years.

Fitch Ratings recently placed UnitedHealth debt on "rating watch negative," citing the firm's disclosure to the SEC that it received a notice of default from some debt-holders, who said it violated its debt-handling responsibilities. The company responded that it "believes it is not in default and intends to defend itself vigorously."

Fitch did point out that UnitedHealth's operating fundamentals and ability to refinance remain strong. The company boasts a customer base that spans many regions and industries, a simplified administrative process, and a decade of strong returns on invested capital.

Balancing promising growth against the options scandal, opinions diverge on the discounted shares of UnitedHealth. According to Thomson Financial, analyst opinions consist of seven "strong buys," nine "buys," five "holds" and one "sell."

Earnings are expected to increase 19 percent this year versus 9 percent forecast for the health-care plan industry. Next year's projected 16 percent increase compares with 15 percent expected industrywide. Its five-year annualized growth rate is pegged at 17 percent versus 15 percent for its peers.

Finally, a federal judge recently ended seven years of litigation by dismissing all remaining claims against the company in a class-action suit involving 700,000 U.S. physicians who claimed it had unfairly cut their reimbursements.

What's happened to my shares of the Yacktman Fund? They aren't what they used to be.

- K.T., via the Internet

Its brand-name portfolio hasn't lived up to expectations.

Run by experienced and respected manager Donald Yacktman, the fund owns a concentrated portfolio of major companies with predictable, steady earnings and impressive cash flows.

While providing outstanding results in the past, these predictable companies have recently performed rather poorly. That shows in the fund's results.

The $365 million Yacktman Fund (YACKX) had a total return of 8 percent over the past 12 months to rank in the lowest 15 percent of large value funds. Compare that to its stellar five-year annualized return of 14 percent, which places it in the top 1 percent of its peers.

"This fund is overdue for a turnaround when high-quality businesses come back into favor," said John Coumarianos, an analyst with Morningstar Inc. "We've seen a multiyear period in which investors have been eager to take on risk - whether higher-yielding bonds or emerging markets."

Donald Yacktman started the fund in 1992 and son Stephen was named its co-manager in 2002. They seek profitable firms selling at discounts with little debt. Consumer goods represent 42 percent of the overall stock portfolio, with other significant concentrations in financial services and media.

That emphasis means this fund can blow hot or cold, depending on market conditions. Although it primarily owns giant companies, it also has a number of large and medium-size ones as well, making it difficult to accurately categorize.

"It will hold a sizable amount in cash, which some investors don't like, and the portfolio is quite concentrated with 36 stocks," Coumarianos said. "But I think it is perfectly reasonable to use it as a core holding in an individual's portfolio with long-term goals in mind."

The Yacktman Fund's largest holdings include several of corporate America's biggest names: Coca-Cola, Kraft Foods, Microsoft, Lancaster Colony, AmeriCredit, Pfizer, Liberty Media Interactive, Henkel KGaA, Liberty Media Capital and Tyco International.

This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment. Its annual expense ratio is 0.92 percent.

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