Disappointing 1Q for Health Net - Analyst Blog


Health Net Inc. 's ( HNT ) first-quarter 2012 operating income, which includes combined net earnings from Western Region and Government Contracts segments, came in at 10 cents per share, declining substantially from the year-ago level of 77 cents per share Reported operating income was also lower than the Zacks Consensus Estimate of 60 cents per share.

Including a $18.5 million loss from discontinued operations (Medicare PDP business sold to CVS Caremark Corporation [ CVS ]), $23.1 million in expenses related to the Northeast operations and the transition of its Medicare PDP business and $3.6 million in expenses pertaining to general and administrative cost reduction efforts, the company reported net loss of $26.6 million or 32 cents per share in the first quarter of 2012, compared with a loss of $108.2 million or $1.16 per share in the year-ago quarter.

The company reported a 15.8% year-over-year downside in total revenue to $2.83 billion in the quarter. The decline was attributable primarily to lower Government Contracts revenues. Total revenue came in below the Zacks Consensus Estimate of $2.88 billion.

Total expenses decreased 17.4% year over year to $2.8 billion, primarily due to decrease in Government contracts expenses.

Segment Performance

Western Region: The segment posted revenues of $2.6 billion in the quarter, up 4% year over year. Net investment income for the segment decreased to $1.5 million from $23.8 million in the year-ago quarter, while health plan services expenses increased 9.5% year over year to $2.3 billion from $2.1 billion.

Total enrollment in the segment crept up 1.2% from March 31, 2011 to 3.0 million members, while total commercial enrollment declined 7.1% to 1.3 million members. Enrollment in the company's California health plan was relatively flat on a year-over-year basis. Although enrollment in the tailored network products recorded a year-over-year increase of 8%, enrollment in Medicare Prescription Drug Plan (PDP) and Medicare Advantage plans declined 5.7% and 8.1%, respectively.

Medical care ratio (MCR) for Health Net's health plan services in the segment increased to 89.6% from 86.5% in the year-ago quarter while Commercial MCR improved to 91.4% from 85.7% in the prior quarter.

Medicare Advantage MCR decreased to 87.9% from 89% in the year-ago quarter.

Government Contracts: Revenues from the segment declined to $181.4 million from $875.1 million in the first quarter of 2011, mainly due to the new T-3 TRICARE North contract implemented on April 1, 2011. The company believes that fiscal 2012 will be characterized by lower revenues, coupled with reduced level of cost for the period of T-3 contract.

Financial Update

As of March 31, 2012, Health Net had cash and investments of approximately $1.8 billion, flat year over year. In addition, the company's debt-to-total capital ratio increased to 26.4% from 21.1% as of March 31, 2011.                       

Health Net's cash provided from operations was $4.2 million in the reported quarter compared with $1.9 billion used in a year-ago quarter.

Total assets of the company stood at $3.97 billion as of March 31, 2012, down from $4.03 billion a year ago. Stockholders' equity also declined to $1.42 billion from $1.49 billion as of March 31, 2011.

Share Repurchase Update

Health Net did not repurchase any shares in the given quarter. The company had $400 million remaining under its current share repurchase authorization as of March 31, 2012.

Outlook for 2012

Health Net revised its guidance for full fiscal 2012. Earnings per share is expected to be in the band of $2.85 to $3.00 and the combined Western Region and Government Contracts segments' guidance lies between $2.35-2.50. The guidance excludes the increasing administrative costs incurred for the implementation of dual-eligibles demonstration pilots.

Enrollment in the commercial business is expected to decline by 7−9%, while enrollment in Medicare Advantage and Medicaid are expected to increase by 11−13% and 3−5%, respectively.

The company expects the total western region membership to decline in the range of 1% to 2%.

Consolidated revenue is expected to be around $11.0−11.5 billion, while tax rate for Health Net is expected to be 37−38%.

The company also expects selling cost ratio to be in the range of 2.3−2.4% and general and administrative expense ratio to be in the range of 8.5−8.7%.

Peer Comparison

UnitedHealth Group ( UNH ) a close competitor of Health Net, reported first quarter earnings of $1.31 per share, substantially higher than the Zacks Consensus Estimate of $1.16. Earnings also compared favorably with $1.22 per share reported in the prior-year quarter.

The outperformance can be attributed to strong revenue growth at UnitedHealthcare, higher revenues from the Optum businesses, and strong enrollment growth, partially offset by higher operating costs.

Aetna Inc. ( AET ) another close competitor, reported its first quarter 2012 earnings of $1.34 cents per share that missed the Zacks Consensus Estimate by 6 cents. Earnings declined 6.3% year over year. Despite an increase in revenues, the growth did not trickle down to the bottom-line results due to higher health care costs and operating expenses.

Zacks Rank

We retain our long term Neutral recommendation on Health Net. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

AETNA INC-NEW (AET): Free Stock Analysis Report
CVS CAREMARK CP (CVS): Free Stock Analysis Report
HEALTH NET INC (HNT): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: AET , CVS , HNT , MCR , PDP



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