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We retain our Neutral recommendation on Health Net Inc. (HNT - Analyst Report) following continued soft results at its Government Contract segment in the third quarter of 2013 and lower health plan enrollment which, in turn, was caused by lower Western Region enrollment. This healthcare plan provider presently carries a Zacks Rank #4 (Sell).

Why the Retention?

Results at Health Net’s Government Contract segment have been unimpressive in recent years, primarily due to the change in terms and structure of the Military & Family Life Counseling (MFLC) contract. The company receives a substantial part of its revenues from this segment and declining segment profits can significantly affect overall profitability.

We are also concerned with Health Net’s health plan enrollment as it has decreased significantly over the past few years. Increased competition and repositioning of the commercial book of business have resulted in a Western Region enrollment decline, subsequently limiting revenue growth and cash flow for the company. Moreover, the ongoing state of the global economy and market conditions characterized by high levels of unemployment, diminished consumer confidence, and volatility in both the U.S. and international capital and credit markets, pose as looming headwinds for the company.

Nevertheless, there are positives to bank upon. Health Plan Services premiums have witnessed improvement over the recent past. Moreover, Health Net’s strong operating performance testifies the company’s capacity to make necessary investments going forward.

In a strategic move, Health Net has been slowly disposing its non-profitable businesses to improve its bottom line. The divestitures of the Medicare stand-alone Prescription Drug Plan (PDP) businesses of subsidiaries in 2009 and 2012 have enriched the company’s cash balance. Additionally, the operational cash flow witnessed a significant improvement in the first nine months of 2013 owing to noticeable expense management and improved health plan premiums.

We are encouraged by Health Net’s attempts to enhance its shareholders’ value through continued share repurchases. This also reflects a strong balance sheet and healthy free cash flow on part of the company.

Health Net also scores well with rating agencies owing to its healthy capital and liquidity position and its investment portfolio.
 
Other Stocks to Consider

Better-placed stocks in the broader medical sector like Almost Family Inc. (AFAM - Snapshot Report) with a Zacks Rank #1 (Strong Buy), and HCA Holdings, Inc. (HCA - Snapshot Report) and VCA Antech Inc. (WOOF - Snapshot Report), both with a Zacks Rank #2 (Buy), are worth considering.
 

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