UnitedHealth ( UNH) has enjoyed some healthier checkups.

Granted, the giant insurer has managed to grow profits by more than 30% for the 18th quarter in a row. But the company is known for barreling through expectations -- and it barely nudged past them this time around.

First-quarter profits jumped by 35% to hit 88 cents a share and beat the consensus estimate by a penny. In recent quarters, however, the company has delivered an average upside earnings surprise that's five times greater than the latest one. And this time around, UnitedHealth actually fell short in at least one vital area. First-quarter revenue of $8.14 billion, while up 17% from a year ago, came in 1.3% shy of expectations.

UnitedHealth investors, unaccustomed to such shortfalls, immediately punished the stock. Shares of the big insurer tumbled 6.4% to $62.60 following the company's Thursday morning conference call.

The plunge came despite reassurance from management that UnitedHealth is well-positioned to flourish even in tough economic climates.

"We have to figure out how to grow and earn more money in the face of this environment," admitted UnitedHealth CEO William McGuire. But "the company is performing very well at this early stage in the year. ... And we expect 2005 to prove to be an excellent year as well."

To punctuate its faith, the company once again raised its guidance for 2004. It now expects to deliver full-year earnings of $3.75 to $3.78 cents a share -- compared to the current consensus of $3.75 -- although its second-quarter forecast of 91 cents simply matches analyst expectations.


Clearly, the economy continues to present challenges. During the latest quarter, Morgan Stanley analyst Christine Arnold calculates, UnitedHealth lost 120,000 customers -- almost twice her expectation -- in its risk-based commercial health division. The unit is particularly vulnerable to cutbacks by struggling corporations.

"The company lost seven large accounts," explained Arnold, who has an overweight rating on UnitedHealth's stock. "We had expected some small group and midsized memberships to offset these losses, but this did not occur."

For its part, UnitedHealth said it sacrificed some of its business because it refused to offer lower prices that lead to money-losing contracts. It also said that falloffs due to attrition could slow down later this year.

Still, the company says it has taken a cautious view on the economy. It expects any recovery to be "slower, more erratic ... and more uneven" than some believe.

In the meantime, UnitedHealth has stepped up its focus on segments that are less sensitive to the current environment. And some of those boasted record-breaking results during the latest quarter.

Ingenix, the company's health information division, delivered its "strongest first quarter ever" by posting a 73% jump in pretax profits. AmeriChoice, which offers Medicaid coverage, reported double-digit profit growth. So did health benefits administrator Uniprise. And the company's Ovations unit, which caters to the growing Medicare population, boasted its strongest revenue ever -- just ahead of new reforms that could lead to substantial growth in this particular market.

Noting some of these improvements, Merrill Lynch analyst Doug Simpson declared the quarter a solid one overall. He was particularly impressed with the company's "very strong" free cash flow of $827 million, which represented a 30% jump from a year earlier and toppled his expectations by nearly $200 million.

Back-Seat Driver

Still, others voiced some concerns. Citigroup Smith Barney analyst Charles Boorady noted, of course, that organic enrollment in the company's health insurance division -- "the biggest revenue and earnings driver" -- continues to decline. And some found disappointments in less vulnerable units as well.

Arnold, for example, had expected higher revenue from both Ingenix and AmeriChoice. But sales growth at Uniprise and another division did surpass her expectations.

Overall, the company increased net income by a whopping 37% to $554 million in the latest quarter. Operating margins jumped from 9.4% to 10.8% year-over-year but remained flat sequentially. The company is benefiting from cost reductions that are expected to continue.

In the end, UnitedHealth celebrated both its latest performance and the opportunities that lie ahead.

"Our businesses produced strong results again this quarter, as we continue to balance our performance around driving growth, sustaining and expanding operating margins and efficiently deploying capital," McGuire stated. "Our recent acquisitions are performing well, and our customers are responding with interest to our newest initiatives."

Several analysts took the opportunity Thursday to reiterate their buy recommendations on the stock.

"We believe investors will place increasing value on the company's earnings diversity," explained Goldman Sachs analyst Matthew Borsch. "The company is well positioned to withstand intensifying competition in most of the market in which it operates ... UNH is one of only two stocks we rate outperform."

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