Health Net's Cash Position Strong, Customer Attrition a Drag

We issued an updated research report on Health Net, Inc. HNT on Sep 23, 2015.

In Jul 2015, Health Net inked a deal with Centene Corp. CNC to be acquired by the latter by early 2016. On culmination of the deal, Centene shareholders will have 71% stake in the combined entity, while Health Net investors will own the remaining 29%. The merger of the two companies should create a diversified multinational healthcare enterprise that will cater to more than ten million members nationwide.

Health Net has been witnessing an increase in premiums in its Health Plan Services segment. The improvement has been backed by strong operating performance and participation in both exchanges as well as the California Coordinated Care Initiative and Medicaid expansion from the Affordable Care Act (ACA). Also, the disposal of non-profitable businesses has been helping the company to focus on core operations and improve the bottom line. Moreover, Health Net's strong operational performance is reflected by its robust operating cash flow. The company also scores strongly with credit rating agencies.

Additionally, the company's cost-management initiatives have been curbing the rise in expenses to some extent. Although expenses increased in both the first and the second quarters of 2015, it was mainly associated with the transaction with Cognizant Technology Solutions Corporation CTSH, which has been suspended post the merger agreement with Centene in July.

However, the rate of customer attrition in Health Net's health plans is alarming. Moreover, declining revenues in the government contracts segment might affect overall profitability. Also, change in estimates for the 3Rs related to 2014 led to a reduction in pre-tax income by $9 million in the second quarter of 2015.

Also, adverse effects of the ACA are headwinds. Health Net expects uncertainties with the reform. These include the funding of provisions related to health plans and doubts regarding the impact of some federal or state health care and insurance reform measures.

Last month, the company reported second-quarter earnings that surpassed the Zacks Consensus Estimate and improved year over year on higher memberships and moderate health care costs.

Health Net currently carries a Zacks Rank #3 (Hold). A better-ranked health maintenance organization is Molina Healthcare, Inc. MOH with a Zacks Rank #2 (Buy).

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MOLINA HLTHCR MOH: Free Stock Analysis Report
 
COGNIZANT TECH CTSH: Free Stock Analysis Report
 
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