UnitedHealth's Filing Follies

The company continues to ponder its backdating problems.
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UnitedHealth

(UNH) - Get Report

, a compensation-related headache has escalated into a full-blown migraine.

The giant health insurer, suspected of granting in-the-money stock options to its wealthy executives, has delayed the filing of its latest quarterly report due to possible accounting changes that could prove material in nature. The changes, if necessary, would reflect the rising value of options issued to company employees -- including massive grants to CEO William McGuire -- and drive up reported expenses as a result.

UnitedHealth's stock tumbled 3.6% to $47.22 on the news.

The filing delay comes five months into an internal investigation of past stock-option grants that could now stretch into November. Moreover, it comes just after the federal government filed criminal charges against executives at

Comverse

(CMVT)

for allegedly backdating stock options of their own.

A.G. Edwards analyst Paul Newsome sounded concerned by the latest development.

"In our view, the delay of the 10-Q is significant evidence that there are real problems with UnitedHealthcare's stock-option accounting," Newsome wrote when downgrading the company's stock from buy to hold on Thursday. "It also increases, in our view, the likelihood that its well-regarded CEO will be pressured to leave."

While leading UnitedHealth through a period of explosive growth, McGuire has cashed in hundreds of millions of dollars worth of stock options over the years. He still has a pile of unexercised options valued at more than $1 billion as well.

UnitedHealth originally expressed confidence in its compensation practices, but since launching its internal review has gone on to change its policies dramatically. Notably, UnitedHealth no longer issues stock options to senior executives -- including McGuire and operating chief Stephen Hemsley -- who already have big equity stakes in the company.

Fear Factor

But some fear the damage that's already been done.

Before UnitedHealth's update on Wednesday, UBS analyst Justin Lake assumed that the company had laid out a worst-case scenario with a "kitchen sink" estimate of possible options-related adjustments in its first-quarter update. Now, however, he feels that the company could raise the high-end estimate of any possible restatement going forward.

Lake, nevertheless, still has a buy recommendation on UnitedHealth's stock. His firm has provided investment banking services to the company.

Meanwhile, CRT analyst Sheryl Skolnick has already noted that UnitedHealth's past estimate of options-related charges could wipe out all of the earnings upside that the company delivered to investors during the relevant period. Thus, further changes could feasibly throw some misses into that mix as well.

Newsome has other worries. Even after Wednesday's update, he doubts that accounting changes would reduce the company's past earnings by more than 10%. However, he suggests that option-related concerns could take a bigger toll on the company's overall valuation.

The recent charges filed against executives at

Brocade

(BRCD)

and Comverse -- two other companies caught up in the sweeping stock-option investigation -- have worsened investor sentiment already.

"The volatility of UNH with regard to any mention of stock-options scandals makes predicting the direction and change of this stock price very difficult in the near term," Newsome wrote on Thursday. "In this case, we may be looking to situations like

AIG

(AIG) - Get Report

,

which was a difficult stock for some time, despite a resurgence in earnings and a settlement. Investors have sometimes taken a very long time to return to broken growth stocks."

Thus, Newsome has started pushing investors toward two other managed-care stocks instead. He considers

Aetna

(AET)

attractively valued after a recent spike in the company's medical costs hammered its shares. He portrays Aetna's problems as "isolated" and the market's reaction to them as "overblown."

Newsome likes industry giant

WellPoint

(WLP)

as well.

"WellPoint has been a solid, consistent operator in the space for years and enjoys one of the best brand names in the sector," he says. Moreover, "the lack of criminal and other allegations give WLP a much more stable stock-price outlook than its rival UNH."

Aetna, a client of Newsome's firm, inched up 8 cents to $34.73 on Thursday. WellPoint rose 15 cents to $75.01.