ZACKS CONSENSUS ESTIMATES

[Pages:7]January 26, 2015

UnitedHealth Group Inc.

Current Recommendation

Prior Recommendation Date of Last Change

NEUTRAL

Outperform 06/24/2012

Current Price (01/23/15) Target Price

$112.00 $118.00

SUMMARY DATA

52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

$113.85 $69.74 57.76 0.54

4,034,051

960 $107,520

3.77 88 2

Annual Cash Dividend Dividend Yield (%)

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

$1.50 1.34

8.8 9.7 52.2

P/E using TTM EPS

19.6

P/E using 2015 Estimate

18.1

P/E using 2016 Estimate

NA

Zacks Rank *: Short Term 1 3 months outlook

2 - Buy

* Definition / Disclosure on last page

? 2015 Zacks Investment Research, All Rights reserved.

(UNH-NYSE)

SUMMARY

UnitedHealth Group Inc. reported fourth-quarter 2014 earnings of $1.55 per share, beating the Zacks Consensus Estimate of $1.50. Earnings grew 9.9% year over year. The improvement came on the back of higher revenues. Strong results from Optum reflected a solid performance at its health services business while the UnitedHealthcare segment also contributed to growth. The company is consistently gaining from robust Medicaid and Medicare businesses and superior performance by its international operations. The company s expanding business on public exchange markets and continued strong growth at Optum are also driving growth. However, Medicare reimbursement cuts, industry fees and taxes, and higher operating costs are some of the headwinds for the company. Nevertheless, UnitedHealth should benefit from capital strength and a niche market position. We thus maintain our Neutral recommendation on the stock.

Risk Level * Type of Stock Industry Zacks Industry Rank *

Below Avg., Large-Blend

Med-Hmo 58 out of 267

ZACKS CONSENSUS ESTIMATES

Revenue Estimates

(In millions of $)

Q1

Q2

(Mar)

(Jun)

2012 2013 2014 2015

27,282 A 30,340 A 31,708 A

27,265 A 30,408 A 32,574 A

Q3 (Sep)

27,302 A 30,624 A 32,759 A

Q4 (Dec)

28,769 A 31,117 A 33,433 A

Year (Dec)

110,618 A 122,489 A 130,474 A 141,427 E

Earnings Per Share Estimates

(EPS is operating earnings before non-recurring items, but including employee

stock options expenses)

Q1

Q2

Q3

Q4

Year

(Mar)

(Jun)

(Sep)

(Dec)

(Dec)

2012 2013 2014 2015

$1.31 A $1.16 A $1.10 A

$1.27 A $1.40 A $1.42 A

$1.50 A $1.53 A $1.63 A

$1.20 A $1.41 A $1.55 A

$5.28 A $5.50 A $5.70 A $6.20 E

Projected EPS Growth - Next 5 Years %

11



111 North Canal Street, Chicago IL 60606

RECENT NEWS

UnitedHealth Beats on Q4 Earnings, Issues 2015 Guidance Jan 21, 2015

UnitedHealth Group Inc. reported fourth-quarter 2014 earnings of $1.55 per share, beating the Zacks Consensus Estimate of $1.50. Earnings grew 9.9% year over year.

The improvement came on the back of higher revenues. Strong results from Optum reflected a solid performance at its health services business while the UnitedHealthcare segment also contributed to growth.

UnitedHealth posted revenues of $33.4 billion, up 7.4% year over year and marginally ahead of the Zacks Consensus Estimate of $33.0 billion. The year-over-year increase was an outcome of broad-based organic growth and business expansion in both health care benefits and health care services.

The fourth quarter medical care ratio of 79.8% was down 140 basis points year over year due to the impact of ACA fees and improved premium yields, partially offset by an unfavorable business mix.

Total operating cost came in at $30.7 billion, up 7% year over year. The increase stemmed primarily from higher medical and operating costs.

For full year 2014, operating income came in at $5.70 per share, beating the Zacks Consensus Estimate of $5.65 per share. The figure was also up 3.6% year over year. Full year earnings came in ahead of the company s guidance range of $5.60 $5.65 per share. Total revenues of $130.5 billion were up 6.5% year over year and ahead of the Zacks Consensus Estimate of $130.2 billion. The company once again exceeded its own guidance of $130.0 billion.

Segment Performance

During the reported quarter, UnitedHealth s health benefits segment UnitedHealthcare witnessed revenue growth of 5.7% year over year to $30.4 billion. The increase came on the back of strong growth in membership in the public and senior sectors, partially offset by a decline in membership in commercial benefits. Earnings from operations of $1.7 billion declined 2.8% year over year.

Revenues from the company s other segment the health services segment branded Optum improved 23.4% to $12.9 billion on a year-over-year basis. Earnings from operations surged 53.5% year over year to $1.0 billion. Continued progress on Optum s plan to accelerate growth and improve margins and productivity by strengthening integration and business alignment drove the improvement.

Membership Enrollment

UnitedHealth ended the quarter with 50.150 million members, compared with 50.395 million members in the year-ago quarter.

Capital Position

Fourth quarter cash flows from operations grew to $2.4 billion, or 1.6x net earnings. The balance sheet position remained strong, with nearly $1 billion of cash available for corporate use and a debt-to-total capital ratio of 35% as of Dec 31, 2014.

Share Repurchases and Dividend

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UnitedHealth Group spent $4.0 billion in share buyback in 2014. It also paid $1.4 billion in shareholder dividends, up 29% year over year. The dividend was increased by 34% in the second quarter culminating in an annual rate of $1.50 per share. Guidance Update

The company projected 2015 revenues in the range of $140.5 billion to $141.5 billion, earnings in the $6.00 to $6.25 per share band, and strong cash flows from operations in the $8.0 billion to $8.4 billion range.

VALUATION

The shares of UnitedHealth currently trade at 18.1x our 2014 earnings estimate, at 0.6% premium to the industry average. On a price-to-book basis, the shares trade at 3.0x, at 20.8% premium to the industry average. The valuation on a price-to-book basis looks attractive, given a trailing 12-month ROE is significantly ahead of the industry average ROE.

Our six-month target price of $118.00 equates to about 19.0x our earnings estimate for 2015. We view the $1.50 per common share annual dividend as secure, implying an expected return of about 6.0% over that period. This is consistent with our Neutral recommendation on the shares.

Key Indicators

UNITEDHEALTH GP (UNH)

P/E

P/E

5-Yr

5-Yr

P/E

P/E

Est. 5-Yr

P/CF

P/E

High Low

F1

F2

EPS Gr%

(TTM)

(TTM) (TTM)

(TTM)

18.1

NA

10.3

15.1

19.6

17.7

7.6

Industry Average S&P 500

18.0 15.0 16.3 15.3

15.3

12.4

23.6

46.2

9.0

10.7

16.1

18.9

19.4

12.0

WellPoint Inc. (WLP)

14.9 13.2

9.7

11.9

17.7

Humana Inc. (HUM)

13.2 11.8

10.0

12.9

13.9

TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow

P/B

Last

P/B

P/B

ROE

D/E

Div Yield

Qtr.

5-Yr High

5-Yr Low

(TTM)

Last Qtr.

Last Qtr.

UnitedHealth Group

Inc. (UNH)

3.0

3.0

1.3

17.0

0.5

1.5

16.0

7.5

13.8

7.2

EV/EBITDA (TTM)

9.7

Industry Average

2.4

2.4

2.4

0.7

0.5

0.7

10.9

S&P 500

5.1

9.8

3.2

24.8

NA

2.0

NA

Surprise and Estimate Revision History

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NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET

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OVERVIEW

Incorporated in Jan 1977 and headquartered in Minnesota, UnitedHealth Group Inc. is a diversified health and well-being company. Through its diversified businesses, the company leverages core competencies in advanced technology-based transactional capabilities; health care data, knowledge and information; and health care resource organization and care facilitation. This helps to improve access to health and well-being services, simplify the medical experience, promote quality and make health care more affordable. These core competencies are focused on two market areas health benefits and health services. Health benefits are offered by UnitedHealthcare and Public and Senior Markets Group, which includes Ovations and AmeriChoice. Health services are provided by Enterprise Services Markets Group, which includes OptumHealth, OptumInsight, and OptumRx.

UnitedHealth s revenues are derived from premium revenues on risk-based products; fees from management, administrative, technology and consulting services; sales of a wide variety of products and services related to the broad health and well-being industry; and investment and other income.

The company reports through four segments:

UnitedHealthcare (accounting for approximately 77.0% of 2013 revenues) includes the combined results of operations of UnitedHealthcare Employer & Individual, UnitedHealthcare Medicare & Retirement and UnitedHealthcare Community & State. UnitedHealthcare Employer & Individual offers a comprehensive array of consumer-oriented health benefit plans and services for large national employers, public sector employers, mid-sized employers, small businesses and individuals nationwide. UnitedHealthcare Medicare & Retirement provides health and wellbeing services to individuals aged 50 and older, addressing their unique needs for preventive and acute health care services as well as services dealing with chronic disease and other specialized issues for older individuals. UnitedHealthcare Community & State provides network-based health and well-being services to beneficiaries of State Medicaid and Children s Health Insurance Programs and other government-sponsored healthcare programs.

OptumHealth (5.0%) provides behavioral benefit solutions, clinical care management and financial services to help consumers navigate the healthcare system, finance their health care needs and achieve their health and well-being goals.

OptumInsight (2.0%) provides database and data management services, software products, publications, consulting services, outsourced services and pharmaceutical consulting and research services in conjunction with the development of pharmaceutical products on a national and international basis.

OptumRx (16.0%) offers a comprehensive suite of integrated pharmacy benefit management services, including retail network pharmacy management, mail order pharmacy services, specialty pharmacy services, benefit design consultation, drug utilization review, formulary management programs, disease management and compliance and therapy management programs.

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REASONS TO BUY

Fast-growing Health Service Segment UnitedHealth s health service business, branded as Optum, comprises OptumHealth, OptumInsight and OptumRx. It is a very important part of the company s diversification strategy. Management is considering the expansion of the health service business to 35 40% of operating income over the long term. To achieve this end, the company has been making acquisitions in the area. The segment s growth potential is particularly compelling as it continues to develop broader, more integrated long-term relationships with larger clients pursuing new approaches to the market. We believe that investment in this field will reap benefits over the long term. Optum expects strong top and bottom-line growth in 2014, with expected operating earnings of $3.3 billion on revenues of $47.3 billion. For 2015, earnings of $3.8 billion on revenues of $52.8 billion are projected.

Expanding Overseas Business UnitedHealth is aggressively expanding its international business due to increasing regulations back home. The major deal to acquire Brazil-based Amil Participa??es S.A attests to the fact. Other overseas acquisitions made by the company include Dubai-based Al Sagr National Insurance Co., which will allow the company to expand in the Middle East. Over time, we expect UnitedHealth to strike more foreign deals.

Expanding ACO Initiative UnitedHealth is intensely focused on expanding its integrated and accountable care leadership throughout 2014 and has set an aggressive target of investing more than $65 billion in value-based contracts with care providers by 2018.

Increasing Exchanges Participation UnitedHealth is aggressively expanding its participation in exchanges in 2015, boosting the number of its markets from six in 2014 to about two dozen in 2015. The company s vast national provider network and the likelihood of future members being healthier than those enrolled so far bode well. UnitedHealth sees a good long-term growth opportunity in the business since 75% of the market is yet to be developed. However, the company is not likely to achieve its long-term margin target of 3 5% in the first two years though it still expects to remain profitable.

Strong Balance Sheet UnitedHealth has a healthy balance sheet with flexibility that is unparalleled, a debt to capital ratio of 35%, parent cash of $2.4 billion and RBC ratio of more than 550%. UnitedHealth is also consistent in its dividend payouts. The company has also been aggressively repurchasing shares. Historically, the company had favored share buybacks and mergers over dividend payments as a way to deploy capital. The company intends to return $4.0 billion in 2014 through share buybacks and dividend. The company has been generating strong cash flow from operations and this action further signals strong longer-term cash flow prospects. The company projects cash flows from operations of $8 billion.

REASONS TO SELL

Investment in ICD-10 and Health Reform UnitedHealth is witnessing increased operating costs in 2014 due to increased medical and operating cost pressures related to the Affordable Care Act and Mental Health Parity Act. The company will also face heightened expenses in complying with the federally mandated ICD-10 coding and HIPAA 5010 standards.

Membership Under Pressure The company continues to expect commercial group risk membership to be stable in 2014, with commercial individual insured membership declining in the course of the year. The number of consumers served in fee-based arrangements is also expected to

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fall due to the loss of the large state account, as well as migration to private exchanges by both

retirees and active employees.

Higher Utilization Expected UnitedHealth had experienced a low level of medical care over the past couple of years leading to reducing medical claim cost and increasing profits. However, management expects a return to more normalized medical utilization trends soon, which will wipe out the extra earnings benefit that the company had been enjoying so far.

Underfunding of the Medicare Advantage Program UnitedHealth s 2014 earnings outlook is expected to be impacted by overall Medicare Advantage funding levels, as well as the effects of a nondeductible insurer fee on Medicare. Moreover, the significant and continued level of underfunding cannot be fully offset in 2014 from the earnings of the company s health benefits market. As such, we expect Medicare underfunding to affect 2014 results. Management expects MA funding cut to eat away more than $0.45 per share in earnings in 2014.

DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of UNH. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1020 companies covered: Outperform - 14.8%, Neutral - 78.8%, Underperform 5.6%. Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

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