Health Net Cost Savings Strong, Government Contracts a Drag

We issued an updated research report on Health Net, Inc. HNT on Dec 7, 2015.

Health Net is due to be acquired by Centene Corporation CNC by early 2016. The merger should create a diversified multi-national healthcare enterprise that will cater to more than 10 million members nationwide.

Health Net has been witnessing an increase in premiums in its Health Plan Services segment over the past few years and the first nine months of 2015 were also no exception. Health Net's strong operating performance has also facilitated necessary investments. These investments have been supporting the company's participation in both exchanges and the California Coordinated Care Initiative and Medicaid expansion from the Affordable Care Act (ACA).

Moreover, the company's disposal of non-profitable businesses to enhance bottom line is an impressive strategy. The company has also been strengthening its operating leverage through noticeable expense management. Additionally, Health Net's strong operational performance is reflected by its robust operating cash flow. The company also scores strongly with credit rating agencies.

However, customer attrition in Health Net's health plans and weakness in the government contracts segment raise caution. Although segment revenues from Government Contracts increased slightly in the first nine months of 2015, lower revenues from the extension option year pricing on the T-3 contract and a higher-than-expected increase in Government Contracts costs raise caution. Moreover, we remain cautious about headwinds from The U.S. Health Care Reform Act.

Last month, the company reported third-quarter 2015 earnings that were in line with the Zacks Consensus Estimate but improved year over year on higher memberships and moderate health care costs.

Health Net currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the health care services space are Triple-S Management Corporation GTS and Molina Healthcare, Inc. MOH. While Triple-S Management sports a Zacks Rank #1 (Strong Buy), Molina Healthcare holds a Zacks Rank #2 (Buy).

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MOLINA HLTHCR MOH: Free Stock Analysis Report
 
HEALTH NET INC HNT: Free Stock Analysis Report
 
CENTENE CORP CNC: Free Stock Analysis Report
 
TRIPLE-S MGMT-B GTS: Free Stock Analysis Report
 
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