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We have retained our Neutral recommendation on Health Net Inc. (HNT - Analyst Report) as declining cash balance and membership and higher debt-to-capital ratio are likely to weigh on company’s growth going forward. This managed healthcare company carries a Zacks Rank #3 (Hold).

Why the Reiteration?

Health Net’s earnings for the second quarter of 2013 came in at $0.52 per share, surpassing the year-over-year earnings by 173.7%. However, results were in line with the Zacks Consensus Estimate.

Health Net’s strength lies in its strong financial position, high liquidity and stringent expense management and policy of disposing non-profitable businesses. The company has been strengthening its operating leverage through noticeable expense management over the past few years and the first half of 2013 was also no exception.

Particularly the government contracts segment witnessed significant decline in expenses due to moderating healthcare costs and the terms and structure of the Military and Family Life Consultant (MFLC) contract entered in Aug 2012. As a result we expect an improvement in margins and bottom-line from the cost reduction initiatives.

Health Net has also been gaining from improving health service premiums. Although the first six months of 2013 suffered a marginal decline, the thorough reduction in expenses in health plan services aided margin expansion. Moreover, Health Net is scheduled to foray into the Arizona Medicaid market in the fourth quarter of 2013 which we expect to aid top line improvement further.

Health Net has a healthy capital and liquidity position and it continues to enhance shareholders’ worth through share repurchases. With a strong balance sheet and its ability to generate healthy cash flow, we expect the company to indulge in more buybacks going forward, thereby sharing more profits with the shareholders. The company also scores strongly with the credit rating agencies.

On the tepid side, the rate of customer attrition in Health Net’s health plans which has led to membership declines concerns us. Increased competition and the company’s efforts to reposition its commercial book of business caused Health Net to lose out on health plan membership in the first half of 2013 and is expected to dip 1%–2% year over year in full year 2013.

Additionally the MFLC contract has been deteriorating the government contract segment revenues. Health Net, which receives a substantial part of its revenues from this segment, is thus likely to be affected adversely going forward.  

Other Stocks to Consider

Other healthcare companies that are worth considering are Aetna Inc. (AET - Analyst Report), UnitedHealth Group Inc. (UNH - Analyst Report) and WellPoint Inc. (WLP - Analyst Report). All these stocks carry a favorable Zacks Rank #2 (Buy).

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