Health Net Awaits Buyout by Centene, Customer Attrition a Drag

We issued an updated research report on Health Net, Inc. HNT on Jan 7, 2016.

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

Health Net's focus on enhancing its operating capacity and boosting premiums is commendable. The company has been witnessing an increase in premiums in its Health Plan Services segment. An improvement in 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 resorts to disposal of non-profitable businesses to enhance its bottom line. Another impressive strategy at the company is its robust expense management. Additionally, Health Net's strong operational performance is reflected by a solid operating cash flow. The company also scores strongly with credit rating agencies.

However, amid all positives, customer attrition in Health Net's health plans and weakness in the government contracts segment raise caution. Additionally, lower revenues from the extension option year pricing on the T-3 contract and a higher-than-expected increase in government contracts costs pose hurdles for the Government Contracts segment. Also, headwinds pertaining to the U.S. Health Care Reform Act serve as a deterrent for the stock.

The company is expected to report fourth-quarter 2015 earnings in the second week of Feb 2016. The Zacks Consensus Estimate for the same is pegged at 66 cents per share, representing year-over-year growth of 2.20%.

Health Net currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the health care services space are Magellan Health, Inc. MGLN, and UnitedHealth Group Inc. UNH. Both Magellan Health and UnitedHealth sport a Zacks Rank #1 (Strong Buy).

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