On Dec 2, 2014, we issued an updated research report on Health Net, Inc. (HNT). We believe that the company’s strategy of disposing non-profitable businesses, increasing liquidity, improving health plan services, along with stable ratings position Health Net favorably to interest investors.
However, lackluster third-quarter earnings and headwinds like the adverse effect of healthcare reforms, poor performance by the government contracts segment and customer attrition are likely to weigh on company financials somewhat.
Last month, this Zacks Rank #3 (Hold) company reported third-quarter earnings that missed the Zacks Consensus Estimate as well as decreased year over year owing to spiraling expenses. Moreover, we remain concerned about the high rate of customer churn in Health Net’s health plans, which have reported membership declines in the recent years. We remain skeptical of any major improvement in the near term due to the present economic conditions.
Additionally, the government contracts segment has been proving to be a concern lately. Revenues at this segment have been declining persistently over the past few years mainly due to the change in the TRICARE contract to the T-3 contract.
Moreover, government contract costs increased in the first nine months of 2014, thereby limiting the desired expansion in margin. Also, the burden of an annual fee or excise tax by the ACA on health insurers is increasing expenses for the company and weighing on its liquidity. Due to the impact of the health insurer fee, the company expects effective tax rate for 2014 to exceed the 35% statutory federal tax rate and rise above 50%, which might weigh on cash flow.
However, positives include the company’s healthy capital and liquidity position, strong scores from credit rating agencies and efficient capital deployment. Continued share repurchases reflect the company’s strong balance sheet and healthy free cash flow, based on which we expect it to indulge in more buybacks going forward.
Meanwhile, Health Net has been strengthening its operating leverage through noticeable expense management over the past couple of years. The company is also expected to benefit from cost savings generated by the impending alliance with Cognizant Technology Solutions, agreed in Aug 2014.
Health Plan Services premiums have witnessed considerable improvement over the past few years. With the increase in memberships in Medicaid and Medicare Advantage, we expect premiums to rise further. Also, Health Net’s disposal of the non-profitable businesses to improve its bottom line is impressive.
Other Stocks to Consider
Better-ranked stocks in the healthcare space include UnitedHealth Group Inc. (UNH), Gentiva Health Services Inc. (GTIV) and Centene Corp. (CNC). While Centene and Gentiva sport a Zacks Rank #1 (Strong Buy), UnitedHealth has a Zacks Rank #2 (Buy).
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