UnitedHealth Group ( UNH) is ready to strut its stuff.

The giant health insurer is poised to deliver another huge jump in profits when it kicks off the sector's third-quarter earnings season on Friday. The company's performance, which has proven strong for years, will then set the stage for expectations about the managed care group as a whole.

Prudential analyst David Shove plans to see some real muscle.

"We expect UnitedHealth Group to report strong 3Q05 earnings with slight upside to consensus," writes Shove, who has long maintained an overweight rating on the stock. And "looking to 2006, we believe UnitedHealth Group will sketch a rosy, robust earnings outlook, which will allay investor concerns over the managed care sector's earnings prospects."

On average, analysts are looking for UnitedHealth to increase third-quarter earnings by at least 20% to 63 cents a share. But they see profit growth slowing down in the year ahead.

Shove clearly expects better. He points to a number of opportunities -- especially those created by recent acquisitions and expanded Medicare coverage -- when explaining his bullish view.

"Reflecting this hopeful outlook, we foresee UnitedHealth Group could aggressively raise its 2006 earnings expectations from its current 15% to the mid-25% range," he writes, "which would be higher than prior year's forward expectations."

In the meantime, Shove suggests, UnitedHealth could benefit from developments that have brought pain to others. For one thing, he says, the company could see its results boosted by the disruption in patient visits caused by Hurricane Katrina. For another, he adds, it could find itself negotiating more attractive contracts with transportation companies that have wound up bankrupt.

Even so, UnitedHealth investors seemed a bit nervous on Thursday. They pushed the stock down 1.4% to $54.26 over concerns that UnitedHealth might fail to clear the high bar they always set.

High Hurdles

Given UnitedHealth's stellar track record, however, Bear Stearns analyst John Rex has suggested that he may have set the bar too low. Rex simply expects the company to meet Wall Street estimates with its quarterly results this week.

"Notably," he says, "our view for 21% earnings growth would represent the first below-30% EPS growth period for the company in 23 consecutive quarters -- leading one to wonder if earnings growth will actually decelerate this meaningfully in a single quarter."

Rex points to UnitedHealth's swelling share count, rather than any deterioration in business, when explaining that slowdown. Specifically, he explains, UnitedHealth must now generate an extra $20 million in pretax earnings "just to move the needle" up a penny a share. Thus, he says, the company would need a whopping $100 million in excess profits to match its previous growth rate. That, he concludes, is "admittedly a bit much to expect."

Nevertheless, analysts still expect plenty. Charles Boorady of Citigroup fully believes UnitedHealth will meet Wall Street's high growth targets -- and even sees the potential for upside if rising co-payments and deductibles have pushed drug and hospital use lower. Regardless, he already predicts that medical costs have drifted downward.

At the same time, he believes, enrollment has continued to climb. And looking ahead, he sees significant new opportunities in both Medicare and consumer-driven plans.

Rex, too, seems excited about the company's Medicare business in particular.

"UnitedHealth Group's continued broad push into the senior market ... certainly provides an alternative growth avenue, offsetting what could likely be slower traditional commercial insured revenue growth for much of the industry," writes Rex, who has an outperform rating on the stock. "To the extent that investors care about a top-line growth story, and for that matter bottom-line ... at least for the next couple of years, Medicare could be the single most important contributor."

For UnitedHealth, Rex estimates, senior-related business will generate nearly 30% of next year's pro forma revenue -- and that excludes the big boost expected from new Medicare Part D coverage.

Delayed Reaction

Similarly, Merrill Lynch analyst Doug Simpson will be looking for another solid quarter from UnitedHealth and fresh details on a promising 2006.

Even so, Simpson questions whether investors will react appropriately. In the past, he notes, they have overlooked the company's strong results and driven its share price lower. He recommends buying the stock if that happens again.

"Those mismatches have created nice little buying opportunities, with the shares gaining an average 24% in the six months following the reporting date," notes Simpson, who has a buy recommendation on the stock. "Buying UNH shares on the date of its earnings release has worked out well for investors."

Boorady views Wall Street's optimism as justified.

"UNH is one of our longest-tenured buy-rated stocks," he acknowledges. But "with only six strong buy ratings -- of 21 covering analysts -- expectations are not unreasonably high for UNH."

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