On Aug 26, 2014,
Health Net, Inc.
) scaled a 52-week high of $45.68 after posting strong
second-quarter financial results, which included a 10.7% positive
earnings surprise. With respect to earnings trend, this healthcare
services provider has delivered positive earnings surprises in two
out of the last four quarters with an average beat of 7.9%.
In fact, shares of Health Net rose nearly 4.5% over the last few
trading sessions to close at $45.59, since the company reported
second-quarter earnings results on Aug 6, 2014. Furthermore, the
one-year return on the stock is 54.1%, much above the S&P 500's
return of 20.2% as well as that of other players in the healthcare
services space like Aetna Inc. (
) and WellPoint Inc. (
) that generated returns of 23.8% and 32.4% respectively, over the
In the reported quarter, Health Net's bottom line not only
surpassed the Zacks Consensus Estimate but also improved year over
year on improved revenues. Total revenues were driven by an
increase in health plan services premium revenues. Health Net
succeeded in enhancing its membership base, evident from the
year-over-year increase in enrollment in the Western Region
Health Net had a strong financial position at the end of
second-quarter 2014, with higher cash and investments, a rebound in
cash flow and increased assets. The company also witnessed an
improvement in its debt-to-capital ratio, reflecting lower
financial leverage. Although the company did not repurchase any
shares in the reported quarter, it intends to engage in buybacks
from the third quarter of 2014. We expect this endeavor to boost
investors' return and be accretive to earnings per share (EPS).
Based on the performance in the second quarter as well as expansion
of health plans, management of Health Net raised its membership
guidance, which is quite encouraging. The outlook regarding other
parameters like net income, revenues, and G&A expense ratio
were reiterated. The reported net income guidance was reaffirmed at
$3.00 per share while the operating net income is expected to be a
minimum of $2.22 per share.
Another positive tiding at the company that contributed to the
52-week high was the alliance with technology giant, Cognizant
Technology Solutions, (
). After completion, this deal will likely benefit the company by
generating $150-$200 million of savings annually in general,
administrative and depreciation expenses by 2017.
Moreover, in Aug 2014, the Department of Veterans Affairs (VA)
expanded its Patient Centered Community Care (PC3) contract,
entailing primary care services to the veterans. For this purpose,
VA has chosen Health Net to aid the expansion. We believe that
securing this deal will help Health Net to enhance its membership
base, thereby driving revenues going forward.
Riding on these positives, the Zacks Consensus Estimate for 2014
and 2015 witnessed estimate revisions. It currently stands at $2.30
per share for 2014, reflecting year-over-year growth of 6.5%. For
2015, the same is pegged at $3.23 per share, translating into a
year-over-year improvement of 40.3%.
Currently, Health Net carries a Zacks Rank #3 (Hold).
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