Health Net Reaches 52-Week High on Strong Q2, Good Tidings - Analyst Blog

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On Aug 26, 2014, Health Net, Inc. ( HNT ) 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. ( AET ) and WellPoint Inc. ( WLP ) that generated returns of 23.8% and 32.4% respectively, over the same period.

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 Operations segment.

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, ( CTSH ). 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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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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