Health Net Discloses 2012 Guidance - Analyst Blog

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Yesterday, Health Net Inc. ( HNT ) revealed its earnings and expense guidance for 2012. The company expects reported earnings of $2.80-2.90 per share in 2012, substantially up from the 2011 guidance of 71-73 cents.

Additionally, the 2012 guidance includes the impact of $15-20 million of pretax expenses, primarily severance costs related to the company's cost reduction efforts and approximately $46-52 million of anticipated pretax expenses related to the run-out of the company's Northeast operations.

Even Health Net's guidance for 2011 includes the impact of expected severance costs and losses from the run-out of the company's Northeast operations.

The combined earnings for the Western Region Operations and Government Contracts segments, which are the main operating segments of Health Net, are expected to be between $3.30-3.40 per share, reflecting an increment from $3.08-3.10 expected in 2011. Consolidated revenue from the two segments will likely be in the range of $11.5-12.0 billion.

Segment Guidance

Western Region: The commercial premium yields per member per month (PMPM) are expected to increase 4.3-4.8% year over year in 2012. Meanwhile, the increase in commercial health care costs PMPM is expected to be 40-60 basis points less than the increase in commercial premium yields PMPM due to disciplined pricing and health care cost management.

Total health plan membership is expected to either remain flat or increase by up to 1%. The maximum contribution to membership increase will likely be from Medicare Part D Prescription Drug Plans, which is expected to generate 10-12% membership growth in 2012.

Medicare Advantage is also expected to witness a substantial enrollment increase of 8-10%, while Medicaid membership is expected to increase by 3-5%. However, Health Net expects the Commercial enrollment to decline by 3-5%.

On the expense side, the general and administrative expense ratio is expected to be between 8.6-8.8%, declining slightly from 8.7-8.9% expected in 2011. Health Net is trying to reduce its corporate overheads and looking at potential outsourcing prospects to reduce its general and administrative expenses.

Government Contracts: The pre-tax contribution from this segment is expected to decline substantially to $90-100 million in 2012 from the 2011 guidance of $180 million.

The selling cost ratio of Health Net is expected to stay flat year-over-year at 2.3-2.4%, while tax rate is likely to be in the ran ge of 38-39% in 2012. Additionally, the company intends to deploy capital through share buybacks, as the outstanding shares guidance stands at 82-83 million, down from 88.9 million as of September 30, 2011.

Our Take

The sizeable increase in Health Net's reported earnings guidance is partly due to the expected share buybacks. Nevertheless, the expected increase in operating income and decline in general and administrative expenses will also contribute.

The decline in Government Contracts segment was expected as the segment has been generating year-over-year declines in revenue since the implementation of the new T-3 TRICARE North contract on April 1, 2011, which allows only revenues and costs related to the administrative services to be recognized. However, the earnings decline from the segment is expected to be compensated by the increased earnings in the Western Region Operation.

Health Net competes with WellPoint Inc. ( WLP ) and UnitedHealth Group Inc. ( UNH ). The company is expected to declare its fourth quarter and full year earnings before the market opens on February 3, 2011.

Currently, Health Net carries a Zacks #2 Rank, implying a short term Buy rating, with a slight upward pressure on the shares over the near term.

HEALTH NET INC ( HNT ): Free Stock Analysis Report

UNITEDHEALTH GP ( UNH ): Free Stock Analysis Report

WELLPOINT INC ( WLP ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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