(UNH) - Get Report

prescription for growth could trigger some unpleasant side effects.

At least that's the view of one analyst who has issued a downgrade -- the first for the company in more than a year -- over concerns about UnitedHealth's future returns. CIBC analyst John Szabo on Tuesday cut UnitedHealth from outperform to perform after concluding that the company is sacrificing its high return on equity in exchange for modest earnings growth by acquiring

Oxford Health



To be fair, Szabo remains convinced that UnitedHealth -- wildly popular on Wall Street -- will continue to be a strong company. But he feels the growth premium UnitedHealth has long enjoyed could be in jeopardy and therefore now favors some competitors instead.

Szabo's downgrade comes at a time when some experts are bracing for a downturn in the health insurance sector overall. Goldman Sachs analyst Matthew Borsch, for example, has been warning for months that health insurers -- among the top performers in the market in recent years -- are finally encountering pricing pressures that will cut into their profitablity.

But Szabo's worries are more company-specific. He is primarily concerned about UnitedHealth "changing financial profile" because of its purchase of Oxford Health.

"In the narrowest sense, United traded a 27% reduction in its ROE for 3% earnings accretion in 2005 -- not exactly a good deal to us, even if the accretion turns out to be twice that high," Szabo wrote. "We think management's attempt to maintain top-line growth through acquisitions comes at a higher cost than most investors appreciate."

Szabo believes the Oxford deal will actually generate more earnings than UnitedHealth has projected. Still, he questions whether the deal is worth the price. He calculates that UnitedHealth's ROE -- which peaked around 40% last year -- has already fallen to 34% and will spiral even lower, to 26%, after the Oxford acquisition.

"In our experience, declining ROEs ultimately pressure valuations," Szabo noted. "United's stock has clearly come off its highs, but is the slide over?"

Szabo's downgrade didn't help. Shares of UnitedHealth, already down from a $68.50 peak this spring spring, slid 50 cents to $65.02 on Tuesday.

Still, Szabo stopped well short of saying investors should sell the stock. And Borsch, for one, has repeatedly pointed to UnitedHealth as a symbol of strength despite his overall concerns about the industry.

Borsch is instead worried about smaller-cap companies that could see their pricing power erode as not-for-profit Blue Cross/Blue Shield competitors start cutting rates after a year of strong growth.

"We continue to expect mostly solid earnings results this year but expect stock upside will remain limited by a headwind of investor concern over intensifying price competition," Borsch wrote late last month. "We predict price competition will intensify as not-for-profit Blues spend down excess profits and as the public companies seek to meet aggressive enrollment growth targets."

Borsch, for one, expects most for-profit insurers to miss their "unrealistically high" enrollment targets for the year. And he expects the companies to undercut each other, lowering industry prices, in the process. Indeed, he says that several companies --


(CI) - Get Report


First Health


Health Net




(HUM) - Get Report

-- have already seen competitive pressures cut into their earnings.

He is particularly concerned about

Coventry Health Care


, which he downgraded from in-line to underperform last month, because of tough competition from both for-profit and not-for-profit players. He views Coventry's commercial growth targets as "increasingly unrealistic" and the company's decision to buy a new Medicaid health plan as a sign of just how tough it is to add new business.

Borsch has expressed similar concerns about Humana but now believes the company, which stands to benefit from higher Medicare profits going forward, is fairly valued after a big haircut this year. He rates only one company --



-- outperform, however.

"Although we acknowledge that Aetna's enrollment growth strategy is contributing to competitive pressure across the industry, we think the company will continue to successfully balance underwriting risk and enrollment growth," Borsch wrote. "We believe upward earnings momentum will continue, with the opportunity for P/E multiple expansion as investors get better confidence in the sustainability and quality of the company's turnaround."

Aetna's stock, which has climbed 41% in a year, tacked on another 2 cents to hit $85.84 on Tuesday.

Borsch also views UnitedHealth favorably, calling it "better positioned than competitors" to weather the current environment, although he doesn't rate the stock. And even Szabo continued to say good things about the company when issuing his downgrade.

"The company remains very well positioned as a leader in healthcare services with a strong balance sheet and excellent free cash flow," Szabo wrote. "To be clear, this is not a call to sell UNH."

By a wide margin, most analysts still believe that investors should purchase the stock. Even so, company insiders have been doing just the opposite. Several officers and directors have cashed in on multimillion-dollar stock sales so far this year. Still, much of that stock was sold at below current prices. The largest transaction, totaling $30 million, would have generated 8% more money today.