UnitedHealth

(UNH) - Get Report

keeps breaking its own records.

The nation's largest health insurer posted its best-ever results in a quarter that can be vulnerable to weaknesses. During the first quarter -- sometimes slowed by new-year coverage changes -- UnitedHealth topped its strong fourth-quarter performance with results that sailed past year-ago figures and easily beat Wall Street expectations.

The company reported first-quarter profits of $1.29 a share, up 40% from a year earlier and 6 cents above the Wall Street consensus estimate. Sales surged 16% to $6.98 billion.

Encouraged by its strong start, UnitedHealth raised its expectations for the entire year. The company now expects to deliver full-year earnings growth of 27% -- instead of the 19% projected earlier -- in 2003.

"It's early in the year, but we're very comfortable with these projections," CEO William McGuire told analysts Wednesday. This is "a prudent view of what our future will be."

But the market -- accustomed to upside surprises from UnitedHealth -- was not impressed. The stock took a surprising hit, tumbling 4% to $89.80 and ending a recent rally that had pushed the shares near last October's three-digit highs.

At least one analyst questioned the quality of the first-quarter earnings, saying profits were lifted past expectations by a 12-cent gain from previous periods. Meanwhile, short-sellers continue to bet heavily against the company. They are convinced that UnitedHealth's supersonic growth rate -- fueled by double-digit premium hikes -- is simply unsustainable in the current environment.

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"The system's going broke," noted short-seller Jim Chanos told

Barron's

in February. "And the HMOs and the like, with their fat margins, are going to be the fall guys."

UnitedHealth has seen operating margins jump from 8% to 9.4% in the past year alone. Meanwhile, McGuire's pay has rocketed ever higher. In a proxy statement filed last week, UnitedHealth revealed that McGuire's bonus soared 40% to $5.28 million in 2002. McGuire also picked up an extra $100,000 in base salary, which climbed to $1.9 million, and options for 650,000 shares.

Even after Wednesday's stock plunge, those options -- priced at $69.55 -- are already in the money and can grow even more valuable before they expire nine years down the road.

The company, which attributes much of its success to McGuire's leadership, describes the executive's compensation as "appropriate" in its recent filing with the

Securities and Exchange Commission

. McGuire's jump in pay came in a year when shares of UnitedHealth climbed 18% even as the broader market fell.

But the stock is nevertheless falling out of favor with some analysts. Although generally embraced by Wall Street, the stock has weathered two downgrades in recent months. SG Cowen cut the stock to market perform shortly after it sailed to record highs last fall, and Fulcrum downgraded the stock to hold within hours of Wednesday's earnings report.