On April 10, 2014, we issued an updated research report on Health Net, Inc. .
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Customer attrition in Health Net’s health plans, which have reported membership declines in recent years due to lower Western Region commercial enrollment and California health plans, raises concerns. Moreover, the ongoing state of the global economy and market conditions are quite challenging with high levels of unemployment, diminished consumer confidence and volatility in both the U.S. and international capital and credit markets.
Revenues from the government contract segment is also witnessing a declining trend mainly due to the change in the TRICARE contract to the T-3 contract, which offers cost reimbursement apart from a fixed fee. The old contract was a risk-based one. The company receives a substantial part of its revenues from this segment and declining segment profits can significantly affect overall profitability.
However, despite the headwinds, Health Net enjoys a healthy capital and liquidity position. Additionally, the investment portfolio of the company is strong which fares well with rating agencies.
Notably, Health Net has been strengthening its operating leverage through noticeable expense management over the past couple of years. Moreover, as a result of favorable rate actions, California Medicaid premium taxes’ reinstatement and the State Settlement Agreement, Medicaid medical cost ratio (MCR) has improved sequentially, implying improved profitability. Controlled expenses are also expected to significantly improve the company’s margins as well as bottom-line results.
With respect to earnings performance, Health Net delivered positive surprises in three of its last four reported quarters. However, in the fourth quarter of 2013, the company reported negative surprise of 10.7%. The earnings miss was primarily due to lower revenues in Western Region Operations and Government Contracts segments.
Health Net presently carries a Zacks Rank #3 (Hold). Some top-ranked stocks worth mentioning in the medical sector are Centene Corp. (CNC - Free Report) , Aetna Inc. (AET - Free Report) and WellPoint Inc. . All these stocks carry a Zacks Rank #2 (Buy).