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Analyst Blog

On Jul 5, 2013, we downgraded our recommendation on Health Net Inc. (HNT - Analyst Report) to Neutral from Outperform based on the significant decline in total membership and weak operating results at the Government Contracts segment. This healthcare company currently carries a Zacks Rank #3 (Hold).

Why the Downgrade?

Customer attrition rates have been a matter of concern for the company over the recent years. Health Net has thereby been struck by consistent membership declines and the first quarter was no exception. Membership declined in the first quarter due to lower Western Region commercial enrollment and California health plans. For 2013, also enrollments are expected to decline.

Given the current state of the global economy and the already challenging market conditions, continuing decline in membership is expected to dampen company profitability in the upcoming terms.

Revenues from the government contracts segment have been declining substantially for some time owing to lower incentives in the TRICARE contract and the terms and structure of the Military and Family Life Consultant (MFLC) contract. Health Net receives a substantial part of its revenues from this segment and declining segment profits can significantly affect overall profitability.

Also, going forward, an increase in expenses is likely for the company owing to the implementation of the U.S. Health Care Reform Act in 2014.

In the last 4 quarters, Health Net has managed to deliver earnings surprise in only one quarter.  Average surprise in last 4 quarters came in at 2.2%.

However, amidst all negatives, the company’s strong capital and liquidity position, continued share repurchases and efficient expense management assists Health Net to actively drive growth.

Other Stocks to Consider

Among others in the industry, Aetna Inc. (AET - Analyst Report) and Molina Healthcare Inc. (MOH - Analyst Report) carry Zacks Rank #1 (Strong Buy) while Select Medical Holdings Corporation (SEM - Snapshot Report) carries a Zacks Rank #2 (Buy) and are worth considering.


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