Sierra Health Services' Lowered Guidance Is Irrelevant

Large Cap Watch List member Sierra Health Services, Inc. (SIE) reported earnings and reduced its full-year earnings guidance:

Sierra had previously announced it expected to earn between $2.30 and $2.40 per share for 2007. The Company now expects to earn between $1.76 and $1.86 per share for the year 2007. This revised guidance includes $48.8 million, or $0.54 per share, in expected losses from the Company’s enhanced benefits PDP product offering along with costs associated with its pending merger with UnitedHealth Group (UNH).

When Sierra initially reported the problems with its PDP line, we pegged the over/under at $0.42 and said:

On this announcement the stock fell just 4.5%, which could suggest that:

• The market believes the impact will be less than $0.42 this year
• The company will be able to raise prices and recover the losses in future years

There may also be other explanations, which we would be happy to hear.

The other explanation, of course, was the announcement that the company would be acquired by United Health (UNH) for $43.50 per share in cash. And that is why, even though the company’s loss fell on the “over” side of our estimate, it just doesn’t make any difference.