Analyst Picks and Pans: Aetna, UnitedHealth, VMware, Callaway

Aetna Inc. (AET)Deutsche Bank reaffirms buyUnitedHealth Group (UNH)

HealthNet (HNT)Humana Inc. (HUM)Deutsche Bank reaffirms hold

Despite multibillion dollar potential, Aetna Inc. and UnitedHealth Group Inc. will likely only benefit modestly from new military health insurance contracts, Deutsche Bank-North America analyst Scott Fidel said on July 14.

In a note to investors, Fidel wrote the health care companies will only see modest boosts to their earnings per share because of the military health insurance contracts. On Monday, The Pentagon picked the companies for its Tricare health program, replacing Humana Inc. and Health Net Inc. in 2010. Tricare is the Defense Department's health care program for military members, their families and survivors

Hartford, Conn.-based Aetna received the support contract for the northern U.S., and will provide health care and administrative services for about 2.8 million members of the military based in the 21 states in the region. Aetna's contract could be worth up to $16.68 billion. But, Fidel said, Aetna only plans on booking revenues for the service aspect of the contract, which he values at around $1.3 billion over the life of the contract.

Meanwhile, Minnetonka, Minn.-based UnitedHealth is taking over a contract for the southern region that could be worth up to $21.83 billion. Humana Inc. is currently under contract in that southern region through March 31, 2010.

Fidel said that UnitedHealth has not yet decided whether it will book gross or net revenues. He said the service component of the contract is worth $1.5 billion.

While the contracts will likely only have a modest benefit for Aetna and UnitedHealth, the awards for them are potentially severe blows to Louisville, Ky.-based Humana and Woodland Hills, Calif.-based Health Net, Fidel said.

"While we thought there was a good chance one of these incumbents would lose a contract, it was quite a surprise to see both of these long-standing incumbents fail to win a new contract," Fidel said.

He said Tricare was expected contribute about 20% of Health Net's earnings before costs in 2010. Humana, meanwhile, now faces the prospect of losing about 9% of its potential earnings before costs in 2010, while its core Medicare business suffers from reimbursement cuts.

He cut his 2010 guidance for Health Net by 15% to $2.04 per share and his Humana forecast by 7% to $4.35 per share.

Fidel reaffirmed a $35 price target on Aetna shares. He raised his price target on UnitedHealth to $26 from $25.

Meanwhile, he cut the price target for Humana to $28 from $30. He also cut the price target on Health Net to $13 from $17.

VMware Inc. (VMW)Jefferies & Co. upgrades to hold from underperform

Licensing revenue is holding up at VMware Inc. thanks to early contract renewals and pre-sales of new software, Jefferies & Co. analyst Katherine Egbert said July 14 as she upgraded the company.

Egbert said second-quarter revenue should meet or edge past expectations. She added that guidance for the September quarter should not disappoint investors as with past earnings releases.

Egbert cautioned that currency rates and slow server shipments are likely to hold revenue down somewhat.

But she hiked her price target to $25 from $20.

Egbert expects analysts to bring the average forecast for third-quarter revenue down by about $10 million to $460 million. "Our checks indicate June was not much better than March, so it's hard to see why (management) could be much more positive with (third-quarter) guidance," she said.

But that should not jolt investors as much as in past quarters, she said. By comparison, VMware told investors in April that it expected revenue for the quarter ending in June of roughly $456.2 million or slightly lower. Analysts had been looking for $499.7 million.

Callaway Golf Co. (ELY)KeyBanc Capital Markets reiterates buy

KeyBanc Capital Markets analyst Scott Hamann said on July 14 that Callaway Golf Co. appears poised for double-digit sales declines in the third quarter.

Hamann said sales were on track to fall by 15% to 20%, a range set by management earlier in the year. He said that promotional activity was "the primary driver behind store traffic and ultimately golf equipment sales, as volumes were meaningfully propped up at the expense of price."

The analyst reduced his price target on the shares to $8 from $12.

Hamann also lowered his 2009 profit estimate to a loss of 5 cents per share and cut his 2010 estimate to profit of 50 cents per share from 70 cents.

Hamann kept a buy rating on the shares based on a longer-term opportunity. "We believe investor expectations are extremely low and expect (Callaway Golf Co.) to be in a position to meaningfully grow earnings over the next several years, even in a soft revenue environment," he wrote in a research report.

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