We retain our Neutral recommendation on
Health Net Inc.
) following continued soft results at its Government Contract
segment in the third quarter of 2013 and lower health plan
enrollment which, in turn, was caused by lower Western Region
enrollment. This healthcare plan provider presently carries a
Zacks Rank #4 (Sell).
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Why the Retention?
Results at Health Net's Government Contract segment have been
unimpressive in recent years, primarily due to the change in
terms and structure of the Military & Family Life Counseling
(MFLC) contract. The company receives a substantial part of its
revenues from this segment and declining segment profits can
significantly affect overall profitability.
We are also concerned with Health Net's health plan enrollment as
it has decreased significantly over the past few years. Increased
competition and repositioning of the commercial book of business
have resulted in a Western Region enrollment decline,
subsequently limiting revenue growth and cash flow for the
company. Moreover, the ongoing state of the global economy and
market conditions characterized by high levels of unemployment,
diminished consumer confidence, and volatility in both the U.S.
and international capital and credit markets, pose as looming
headwinds for the company.
Nevertheless, there are positives to bank upon. Health Plan
Services premiums have witnessed improvement over the recent
past. Moreover, Health Net's strong operating performance
testifies the company's capacity to make necessary investments
In a strategic move, Health Net has been slowly disposing its
non-profitable businesses to improve its bottom line. The
divestitures of the Medicare stand-alone Prescription Drug Plan
(PDP) businesses of subsidiaries in 2009 and 2012 have enriched
the company's cash balance. Additionally, the operational cash
flow witnessed a significant improvement in the first nine months
of 2013 owing to noticeable expense management and improved
health plan premiums.
We are encouraged by Health Net's attempts to enhance its
shareholders' value through continued share repurchases. This
also reflects a strong balance sheet and healthy free cash flow
on part of the company.
Health Net also scores well with rating agencies owing to its
healthy capital and liquidity position and its investment
Other Stocks to Consider
Better-placed stocks in the broader medical sector like
Almost Family Inc.
) with a Zacks Rank #1 (Strong Buy), and
HCA Holdings, Inc.
VCA Antech Inc.
), both with a Zacks Rank #2 (Buy), are worth considering.