On Aug 29, 2014, we issued an updated research report on Health Net, Inc. (HNT). We believe that strong expense management initiatives, increased health service premiums and a solid cash position should drive growth.
Earlier, Health Net reported second-quarter 2014 results that surpassed the Zacks Consensus Estimate and improved year over year on higher revenues. However, decline in Small and Large Group enrolment and the adverse effects of Health Care Reform are setbacks.
Health Net has a healthy capital and liquidity position that enables it to undertake strategic initiatives and efficient capital management activities. Health Net continues to enhance shareholders’ value through continued share repurchases. Although the company did not buy back any shares in the first half of 2014, management stated that it intends to resume repurchases again in the third quarter of 2014. Given its strong financial position, we expect Health Net to indulge in more buybacks going forward, thereby sharing more profits with shareholders.
This Zacks Rank #3 (Hold) stock has been strengthening its operating leverage through noticeable expense management over the past couple of years. This has also increased margins significantly. Additionally, the deal with Cognizant Technology Solutions (CTSH) this month, which is awaiting approval, will likely generate $150–$200 million of annual savings in general, administrative and depreciation expenses by 2017, boosting margins further.
Health Plan Services premiums have witnessed improvement over the past few years and the first half of 2014 was no exception. With the increase in memberships in Medicaid and dual eligibles, we expect premiums to rise further going forward.
On the flip side, the rate of customer attrition in Health Net’s health plans raises caution. Given the present state of the global economy and challenging market conditions with high levels of unemployment, low consumer confidence and volatility in both the U.S. and international markets, we remain skeptical about a significant increase in enrollments.
Revenues from the government contracts segment of Health Net have been declining over the past few years. Although government contracts segment revenues increased slightly in the first half of 2014, a rise in government contacts costs limited the desired margin expansion in the segment. Moreover, provisions of the Health Care Reform like establishment of minimum medical loss ratios and restriction on charging higher premiums from patients with pre-existing medical conditions will likely increase expenses going forward.
Health Net incurred reinsurance recoverable, risk corridor receivable and a payable for the risk adjustment charge related to the premium stabilization provisions in the Affordable Care Act (ACA). Settlement charges like these are likely to weigh on company’s cash flows going forward.
Other Stocks to Consider
Better-ranked stocks in the healthcare services space include Gentiva Health Services Inc. (GTIV) and Chemed Corp. (CHE). Both sport a Zacks Rank #1 (Strong Buy).
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