We have retained our Neutral recommendation on
Health Net Inc
) as declining cash balance and membership and higher
debt-to-capital ratio are likely to weigh on company's growth
going forward. This managed healthcare company carries a Zacks
Rank #3 (Hold).
Why the Reiteration?
Health Net's earnings for the second quarter of 2013 came in at
$0.52 per share, surpassing the year-over-year earnings by
173.7%. However, results were in line with the Zacks Consensus
Health Net's strength lies in its strong financial position, high
liquidity and stringent expense management and policy of
disposing non-profitable businesses. The company has been
strengthening its operating leverage through noticeable expense
management over the past few years and the first half of 2013 was
also no exception.
Particularly the government contracts segment witnessed
significant decline in expenses due to moderating healthcare
costs and the terms and structure of the Military and Family Life
Consultant (MFLC) contract entered in Aug 2012. As a result we
expect an improvement in margins and bottom-line from the cost
Health Net has also been gaining from improving health service
premiums. Although the first six months of 2013 suffered a
marginal decline, the thorough reduction in expenses in health
plan services aided margin expansion. Moreover, Health Net is
scheduled to foray into the Arizona Medicaid market in the fourth
quarter of 2013 which we expect to aid top line improvement
Health Net has a healthy capital and liquidity position and it
continues to enhance shareholders' worth through share
repurchases. With a strong balance sheet and its ability to
generate healthy cash flow, we expect the company to indulge in
more buybacks going forward, thereby sharing more profits with
the shareholders. The company also scores strongly with the
credit rating agencies.
On the tepid side, the rate of customer attrition in Health Net's
health plans which has led to membership declines concerns us.
Increased competition and the company's efforts to reposition its
commercial book of business caused Health Net to lose out on
health plan membership in the first half of 2013 and is expected
to dip 1%-2% year over year in full year 2013.
Additionally the MFLC contract has been deteriorating the
government contract segment revenues. Health Net, which receives
a substantial part of its revenues from this segment, is thus
likely to be affected adversely going forward.
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Other Stocks to Consider
Other healthcare companies that are worth considering are
UnitedHealth Group Inc.
). All these stocks carry a favorable Zacks Rank #2 (Buy).