We are upgrading our recommendation on
Health Net Inc.
) to Neutral from Underperform based on its strong financial
position and high liquidity. Additionally, the policy of disposing
non-profitable businesses, which has enabled the company to
concentrate on its core western markets, is a long-term
Health Net, which competes with
UnitedHealth Group Inc.
), has a strong capital and liquidity position, with total cash and
investments of $1.8 billion against total long-term debt
obligations of $746 million at the end of March 2012. Additionally,
the investment portfolio of the company is strong, with an average
rating of "A+" and "A1" as per S&P and Moody's,
Moreover, in May 2012, A.M. Best affirmed the issuer credit
ratings (ICR) of Health Net as well as the debt rating on the
company's $400 million senior unsecured notes, due 2017, at "bb"
with a 'Stable' outlook. In the same month, S&P reaffirmed the
long-term counterpart credit rating (CCR) of Health Netat "BB",
with a 'Stable' outlook. The strong ratings reflect the company's
profitable business mix and strong risk profile, which offset
concerns related to the limited geographic expansion and product
Health Net has been slowly disposing its non-profitable
businesses to improve its bottom line. The divestiture of the
Medicare stand-alone Prescription Drug Plan (PDP) business of
subsidiary - Health Net Life Insurance Co. - has been beneficial
for the company, given the steady decline in its PDP enrollment,
along with a constant hike in the PDP Medical Care Ratio (MCR).
On the flip side, Health Net's total revenue has been declining
over the past few quarters, mainly due to lower revenues from the
Government Contracts segment arising from the new T-3 TRICARE North
contract, which restricted the earnings that can be recognized. The
rate of customer attrition in the company's health plans also
remains a cause for concern.
While total health plan enrollment remained almost flat in 2011,
it declined 2.6% and 19% year over year in 2010 and 2009,
respectively. Membership is expected to remain almost flat in 2012
as well, thus limiting the revenue growth.
Moreover, Health Net had to incur a significant amount of
litigation-related expenses in the recent past, which not only
increased debt but also weighed heavily on the financial leverage.
Last year, the company borrowed $185 million under its revolving
credit facility mainly to pay down litigation expenses.
Health Net is expected to report its second quarter 2012
financial results on August 3, 2012 before the bell. The Zacks
Consensus Estimate for the company's second-quarter 2012 earnings
stands at 66 cents per share, down 12.8% year over year.
Currently, Health Net carries a Zacks #4 Rank (short-term Sell
HEALTH NET INC (HNT): Free Stock Analysis
UNITEDHEALTH GP (UNH): Free Stock Analysis
WELLPOINT INC (WLP): Free Stock Analysis Report
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