UnitedHealth Revival Play

Bulls see Thursday's earnings as a potential catalyst.
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This week,

UnitedHealth

(UNH) - Get Report

will have a fresh chance to get its act together.

The fallen Wall Street darling, hurt by last year's stock option scandal and some recent missteps, kicks off the managed care earnings season when it reports its own first-quarter results on Thursday. Given all its recent setbacks, the giant health insurer no longer faces the sky-high expectations that it once did.

"If you're not a fan of United's stock, you haven't had to work all that hard lately to justify your position," CIBC World Markets analyst Carl McDonald wrote on Tuesday. But "we think there's a lot of bad news already incorporated into United's stock as we head into first-quarter earnings, potentially setting the stock up for a nice day if the company can deliver on a few key items."

UnitedHealth has already taken care of one. On Tuesday, the company announced that it has not only renewed but also expanded a high-profile contract with AARP that looked threatened by last year's corporate governance scandals.

Now McDonald looks for two more achievements. He would like to see UnitedHealth unveil a "meaningful restructuring program" that could bring some cost savings to the company. Meanwhile, he hopes for a strong first-quarter report.

"All these things are achievable," he wrote. But "beating expectations and raising guidance in the first quarter would certainly be a nice start."

McDonald, for one, expects UnitedHealth to do just that. He predicts that the company will post first-quarter profits of 73 cents a share, up 16% from a year ago and 2 cents ahead of the consensus estimate. He says that the company's full-year forecasts "have room to move higher" as well.

McDonald has an overweight recommendation on UnitedHealth's stock. His firm plans to secure investment banking business from the company over the next three months.

Still, as McDonald readily admits, UnitedHealth has been issuing some disappointing updates of late. For starters, he notes, the company "slashed" its Medicare Advantage enrollment projections twice in a single month and still looks poised to miss even its lower targets. In addition, he says, the company cut its growth outlook for a key commercial segment and faces a shortfall in its Medicare drug business to boot.

Meanwhile, he adds, UnitedHealth has warned that its medical cost ratio -- a key profitability factor that measures how much of each premium dollar is spent on patient care -- will be worse than it originally thought.

Analysts hope for no further surprises in that metric, especially as it applies to UnitedHealth's lucrative commercial business. They remind that troubling MCR numbers, posted by competing companies, hammered the entire group this time last year.

"Considering the stock reaction to such indications last year -- the group sold off 10% during the reporting period -- the heightened sensitivity is certainly understandable," Bear Stearns analyst John Rex wrote on Monday. "Most closely watched this year will likely be UnitedHealth, though at this point it would appear to be at least somewhat anticipated in the stock."

Rex expects UnitedHealth to match Wall Street profit estimates exactly. He has an outperform rating on the company and an overweight recommendation on the managed care group as a whole. His firm seeks to do business with the companies it covers.

To be fair, Rex feels that the sector's most glorious days could be over. But he still likes the group nonetheless.

"Looking ahead for 2007, we doubt that the stocks will show anywhere near the level of out-performance that the group has posted over the six-year 2000-'05 period -- during which annual returns averaged 50%," he admits. But "longer term, we believe that low-double-digit growth is sustainable

and represents a considerably more favorable earnings outlook than the broader market offers."