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(UNH) - Get Free Report

, jabbed in recent weeks for its generosity to executives, has just thrown a powerful punch of its own.

The giant health insurer delivered a knockout first quarter, as it flexed its muscles in the growing senior and consumer-driven health care markets. The company reported first-quarter operating profits of 68 cents a share -- up 24% from a year ago -- that beat the consensus estimate by 4 pennies.

The company also raised its full-year guidance slightly to between $2.88 and $2.92 a share, although Wall Street was looking for profits to fall in the middle of that range already. But the company issued preliminary 2007 guidance of $3.31 to $3.36 a share that came in lower than the current $3.38 consensus estimate.

Ultimately, it was the company's outlook -- which leaves room for upside from Medicare opportunities in particular -- that proved disappointing to some investors. The company's stock opened on Tuesday with a 2% gain but quickly lost ground, tumbling 3.7% to $49.75, as investors digested fresh details offered during an early-morning conference call.

In addition to lackluster 2007 guidance -- which assumes a slowdown in profit growth to 15% -- the call brought fresh questions about the company's controversial stock option grants.

One analyst specifically asked CEO William McGuire whether company executives had ever received back-dated options that were priced at especially favorable prices. McGuire, who has become a billionaire as a result of generous option awards, failed to answer the question directly but said that he and other company leaders "sleep with good conscience" due to confidence in their past decisions.

Even so, McGuire stressed that he personally recommended that UnitedHealth establish a special committee to evaluate the company's compensation practices. Going forward, he suggested that UnitedHealth might reconsider option grants for executives who already have plenty and even split the chairman and CEO roles -- which he has long filled -- as the board reviews its overall corporate governance program. He promised a fuller update when investors gather for their annual meeting in May.

Most analysts continue to recommend buying UnitedHealth's stock in the meantime.

"Although these questions (about compensation) are serious, we do not believe they affect the fundamental outlook for the company," Prudential analyst David Shove wrote on Tuesday. Thus, "we remain bullish and suggest that health care investors take advantage of this opportunity to own a high-quality, fast-growing managed care company at an extreme discount."

UnitedHealth's stock has now fallen 23% from the record high of $64.61 that it set near the end of last year.

Explosive Growth

Meanwhile, the company's business continues to explode.

First-quarter revenue increased 54% to $17.2 billion after the recent acquisition of PacifiCare, a major player in the Medicare market. Meanwhile, net income jumped 21% to $899 million -- and grew at an even faster clip when results were normalized to better reflect the new Medicare Part D business.

By the end of the first quarter, UnitedHealth found itself serving some 4.5 million Medicare customers and boasting its "most successful new business launch in company history." Even so, the company has so far refrained from raising its Medicare enrollment targets for the entire year.

In the meantime, UnitedHealth has enjoyed phenomenal growth in its consumer-driven business as well. There, enrollment jumped by a whopping 76% during the first quarter and now includes 1.6 million members.

Company executives reported solid demand for all of its consumer-driven health plans -- with individuals, small businesses and large corporations all lining up for the more affordable offerings.

As usual, however, more customers have been shying away from UnitedHealth's standard risk-based insurance plans. During the latest quarter, the company lost more than 250,000 risk-based customers but more than offset that decline with strong growth in its fee-for-service business.

Meanwhile, medical cost trends continued to moderate, and cash flow -- hurt last quarter by some timing issues -- rebounded strongly to come in at 1.7 times net income.

"UnitedHealth Group's 1Q06 results appear strong across all operating, cash flow and balance sheet metrics," Shove declared. "Despite any reporting confusion from the addition of PacifiCare and the growth of Part D, the internals were excellent, in our view."

JPMorgan analyst Scott Fidel offered a similar take.

"Overall, we view 1Q as a solid quarter with 2006 EPS outlook still accelerating," Fidel wrote in a brief note on Tuesday morning. And "we reiterate our overweight rating on UNH shares."

JPMorgan helped manage a public offering of UnitedHealth securities over the past 12 months and expects to receive additional investment-banking business from the company in the months ahead.