UnitedHealth Sniffles

For the first time in recent memory, a major Wall Street analyst has started warning investors to sell their stock in UnitedHealth Group (UNH Quote).

Goldman Sachs analyst Matthew Borsch kicked off the week by reiterating his underperform rating on UnitedHealth, even with the stock nearly 15% below its late-December high. Borsch listed multiple reasons for his contrarian view.

He cited falling profit at recently acquired PacifiCare, possible problems with earnings quality, near-term integration risks, marketplace "noise" about declining customer service and the company's poor ranking on corporate governance scores when explaining his bearish view on Sunday.

Borsch initiated his underperform rating on UnitedHealth two months ago, around the time that the company wrapped up its acquisition of PacifiCare and released fourth-quarter results that failed to excite investors. In contrast, other Wall Street analysts have continued to recommend that investors buy or hold the shares.

The stock, which peaked at a record $64.61 as 2005 drew to a close, tumbled 2.5% to $54.75 on Monday.

Red Flags

Borsch has voiced some troubling concerns about the company's PacifiCare division in particular. Based on state insurance filings, he says, PacifiCare saw earnings in its major market of California cut in half during the latest quarter. He cites a big spike in medical costs as the reason.

At the same time, Borsch raises questions about the company's earnings in general. Notably, he points out, the company's medical expenses have been climbing even while its reserves for medical claims have remained virtually unchanged.

"While this trend has been attributed to an acceleration in the claims cycle, the recent 10-K disclosures show that the percentage of medical claims incurred and paid during the current year actually declined in 2005," Borsch writes. Thus, "we highlight the risk that some portion of the $540 million in favorable prior-period reserve releases recognized during 2005 (worth 26 cents of earnings per share) may not have been fully replenished, suggesting a possible decline in the quality and underlying strength of earnings."