UnitedHealth

(UNH) - Get Report

is looking stronger than ever.

The giant health insurer on Thursday beat first-quarter expectations -- growing operating profits by 43% -- and raised the bar for the year. It reported improvements across all of its major business lines.

CIBC analyst Carl McDonald spotted a company on fire with enough power to fuel a rally in the entire group.

"The stock has sold off sharply in the last few days, owing primarily to concerns about higher hospital utilization," wrote McDonald, who has an overweight rating on the shares. But "the solid quarter reported by United this morning and the improved outlook should be enough to move the whole group higher."

But UnitedHealth actually dropped $2.36 to $93.60 as investors took profits on a stock that's up more than 50% off last spring's lows.

Big Bang

Even so, UnitedHealth kicked off the sector's earnings season with something of a bang.

Onward and...
UnitedHealth's long run

During the latest quarter, UnitedHealth saw revenue jump 34% to $10.9 billion -- just shy of the $11 billion consensus estimate -- and other key metrics rocket higher as well. Per-share earnings soared 32% to $1.13, coming in 3 cents ahead of expectations. Operating income surged 43% to $1.26 billion. And cash flow rose 33% to $1.2 billion.

McDonald was particularly impressed by the last figure.

"Operating cash flow for the first quarter was outstanding," he said. And "keep in mind also that United received its January 2005 Medicare payment in December 2004. Had this payment occurred in January, cash flow would have been $1.48 billion."

Meanwhile, UnitedHealth did get a boost this time around from favorable "prior period developments." The adjustment to reserves added $190 million -- or an estimated 19 cents a share -- to its first-quarter profits. It was also much larger than the $90 million adjustments taken both one quarter and one year ago.

But McDonald expressed no concern about the profit-boosting mechanism that has troubled some others in the past.

"We view the company's favorable development positively, as it is a sign of conservative reporting," he wrote. But "we would not be surprised to see favorable development slow next year."

Mixed Results

In the meantime, enrollment is already growing more slowly than some people had expected. Most notably, the company's traditional health insurance business added just 95,000 members in the latest quarter and failed to meet management's own projections. Additions at Uniprise -- a well-being and technology business -- were also somewhat light, McDonald said. The company's Medicare business -- which grew by 15,000 members since the last quarter alone -- emerged as "the one bright spot" of growth, he added.

For its part, UnitedHealth applauded its performance overall. In its health insurance business, revenue jumped 37% and operating profits climbed an even higher 58%. The division benefited from a drop in its "medical care ratio" due to cost-containment efforts.

At Uniprise, both revenue and operating profits rose a solid 13%. The company's two smaller divisions, specialized care services and Ingenix, posted double-digit gains as well.

In total, UnitedHealth portrayed its results as quite strong as it delivered yet another record quarter for investors.

"Our focus on the imperatives of affordability, access, quality and usability -- applied broadly within the health care system -- has positioned us for sustained future performance," CEO William McGuire said. "Looking specifically to 2005 financial performance, our strong first-quarter results and improving business momentum are cause for a strengthened forward outlook."

The company now expects to grow full-year profits by 24% to between $4.85 and $4.90 a share. Wall Street had been banking on earnings of just $4.82 instead.