Health Net Downgraded to Hold

We downgrade Health Net, Inc. (HNT - Analyst Report) to Hold from Buy, and remain concerned with the rate of customer attrition in the insurer's commercial health plan segment. Significant declines in commercial members over time will challenge operational efficiencies and increase the company's reliance on government-sponsored programs increasing reimbursement risk.

Health Net's two primary markets, California and the Northeast, are highly competitive. Both markets have a high number of large managed care plan providers and groups of powerful hospitals. Price competition is more prevalent in these markets due to the high number of providers, and both markets have suffered in the recent economic downturn with higher levels of unemployment. Health Net is not well positioned to compete in either region.

We continue to believe HNT is an attractive takeover target given its significant market share in the key states of California and New York and have valued HNT on a forward price/earnings (P/E) basis, as well as in comparison to similar firms in the managed care sub-sector of healthcare. Our $34.75 price target is derived using a multiple of 10.5 x FY08 EPS of $3.31.

Read the full analyst report on HNT