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Health Net Stays in Neutral Lane

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We have retained our Neutral recommendation on Health Net Inc. as the declining membership and deteriorating Government Contracts segment results are expected to weigh on the positives of the company. This managed healthcare company carries a Zacks Rank #3 (Hold).

Why Reiterate?

We remain concerned with the rate of customer attrition in Health Net’s health plans in the recent years. Revenues from the Government Contract segment have also been declining due to changes in the TRICARE and Military and Family Life Consultant contracts.

Nevertheless, Health Net had a strong capital and liquidity position with total cash and investments of approximately $2.0 billion at the end of Sep 2012. Additionally, the investment portfolio of the company is strong, with an average rating of “A+” and “A1” as per Standard & Poor’s and Moody’s Investor Service of Moody’s Corp. (MCO - Free Report) , respectively.

Moreover, Health Net’s total expenses have been declining since 2010. Lower expenses can significantly improve the company’s margins as well as bottom-line results. Further, the company has been slowly disposing of its non-profitable businesses to improve its bottom line.

Health Net’s third-quarter 2012 operating income, which includes combined net earnings from the Western Region and Government Contracts segments, came in at 38 cents per share, declining substantially from the year-ago level of 84 cents per share. The company expects operating earnings per share between $1.00 and $1.10 in 2012. The Zacks Consensus Estimate of $1.04 per share lies within this guidance range.

The company is scheduled to release its fourth quarter and full year 2012 financial results before the opening bell on Jan 30, 2013. The Zacks Consensus Estimate for fourth quarter stands at 37 cents per share, down 61% year-over-year.

Other Stock to Consider

Although we have a cautious stance on Health Net, other stocks like American Caresource Holdings, Inc. and Molina Healthcare, Inc. (MOH - Free Report) , both carrying a Zacks Rank #2 (Buy), are worth considering.

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