On Jul 5, 2013, we downgraded our recommendation on
Health Net Inc.
) to Neutral from Outperform based on the significant decline in
total membership and weak operating results at the Government
Contracts segment. This healthcare company currently carries a
Zacks Rank #3 (Hold).
Why the Downgrade?
Customer attrition rates have been a matter of concern for the
company over the recent years. Health Net has thereby been struck
by consistent membership declines and the first quarter was no
exception. Membership declined in the first quarter due to lower
Western Region commercial enrollment and California health plans.
For 2013, also enrollments are expected to decline.
Given the current state of the global economy and the already
challenging market conditions, continuing decline in membership
is expected to dampen company profitability in the upcoming
Revenues from the government contracts segment have been
declining substantially for some time owing to lower incentives
in the TRICARE contract and the terms and structure of the
Military and Family Life Consultant (MFLC) contract. Health Net
receives a substantial part of its revenues from this segment and
declining segment profits can significantly affect overall
Also, going forward, an increase in expenses is likely for the
company owing to the implementation of the U.S. Health Care
Reform Act in 2014.
In the last 4 quarters, Health Net has managed to deliver
earnings surprise in only one quarter. Average surprise in
last 4 quarters came in at 2.2%.
However, amidst all negatives, the company's strong capital and
liquidity position, continued share repurchases and efficient
expense management assists Health Net to actively drive growth.
Other Stocks to Consider
Among others in the industry,
Molina Healthcare Inc.
) carry Zacks Rank #1 (Strong Buy) while
Select Medical Holdings Corporation
) carries a Zacks Rank #2 (Buy) and are worth considering.
AETNA INC-NEW (AET): Free Stock Analysis
HEALTH NET INC (HNT): Free Stock Analysis
MOLINA HLTHCR (MOH): Free Stock Analysis
SELECT MEDICAL (SEM): Free Stock Analysis
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