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Health Net Q2 Earnings Beat on Higher Revs, Guides In-Line

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Health Net Inc.’s (HNT) second-quarter 2014 operating income, which comprised combined net earnings from the Western Region Operations and Government Contracts segments, came in at 62 cents per share. The figure surpassed the Zacks Consensus Estimate of 56 cents and year-ago earnings of 52 cents per share.

Health Net, Inc - Earnings Surprise | FindTheBest


Including severance costs and tax benefit from a loss on the stock of subsidiary, Health Net recorded net income of $1.49 cents per share, much higher than 42 cents in the prior-year quarter.

Improved revenues offset higher expenses and led to the improvement.

The company’s total revenue increased 24.9% year over year to approximately $3.4 billion, in line with the Zacks Consensus Estimate.

Health plan services premium revenues of Health Net were $3.3 billion, up 26.5% from the second quarter of 2013. Meanwhile, total health plan service expenses increased 26.1% to $2.8 billion. The company’s total expenses increased 23.7% year over year to $3.3 billion.

Segment Performance

Western Region Operations: This segment of Health Net posted revenues of $3.3 billion in the quarter, up almost 27% year over year. Net investment income declined about 30% year over year to $12 million. Health plan services expenses increased 27.3% year over year to $2.8 billion.

Total enrollment in the segment rose 17.4% year over year to 2.9 million members as of Jun 30, 2014 on sustained commercial growth from exchanges and Medicaid growth. Western Region commercial enrollment increased 10.4% to 1.3 million members as of Jun 30, 2014, while the enrollment under the company’s California health plans increased 14.3% year over year to 2.5 million members. Enrollment increased 11% to 0.26 million in Medicare Advantage plans. Medicaid enrollment also increased 25.6% to 1.4 million as of Jun 30, 2014.

Medical care ratio (MCR) for Health Net’s health plan services in the segment improved to 84.7% from 85% in the year-ago quarter. Commercial MCR improved 260 basis points to 82.3% from 85.9% in the prior-year quarter. This was driven by an improvement in cost trends, better business mix and higher premiums. Medicare Advantage MCR deteriorated to 90.9% from 89.9% a year ago. Medicaid MCR amounted to 83.6% compared with 79.5% in the year-ago quarter.

Government Contracts: Revenues from this segment increased to $154.1 million from $139.9 million in the second quarter of 2013. The segment’s expenses also increased to $132.6 million from $121.8 million in the prior-year quarter.

Financial Update

As Jun 30, 2014, Health Net had cash and investments of approximately $2.3 billion, up from $1.9 billion as of Jun 30, 2013. The company’s debt-to-total capital ratio improved to 21.5% as of Jun 30, 2014 from 25.6% as of Jun 30, 2013.

Health Net’s operating cash outflow was $13.8 million in the second quarter of 2014, comparing favorably with outflow of $106.3 million in the year-ago quarter.

Total assets of Health Net were worth $4.8 billion as of Jun 30, 2014, higher than $3.9 billion as of Jun 30, 2013. Stockholder equity was $1.8 billion as of Jun 30, 2014 compared with $1.5 billion as of Jun 30, 2013.

Share Repurchase Update

Health Net refrained from any share repurchase during the reported quarter. Currently, the company is left with $280 million worth of shares to be repurchased under its existing $400 million authorization.

Business Update

Health Net inked a deal with Cognizant Technology Solutions (CTSH) and expects to execute a definitive services agreement before the ongoing quarter ends.  It will likely generate $150 million to $200 million in general and administrative, and depreciation expense savings annually by 2017. The agreement is pending approval.

Outlook for 2014

Health Net reiterated its reported net income guidance of a minimum of $3 per share for 2014 while operating income is expected to be a minimum of $2.22 per share.

Total health plan membership is now expected at 3.1 million, higher than the previous guidance of 3.05 million. This is because total Medicaid membership is anticipated at 1.585 billion, (up from the previous guidance of 1.535 billion).

Health Net retained its revenue guidance at $14 billion.

Health Net reiterated its 2014 G&A expense ratio guidance at 10.8%.

Other Healthcare Services Companies

WellPoint Inc. (WLP) reported second-quarter 2014 adjusted income of $2.44 per share, beating the Zacks Consensus Estimate of $2.28 per share.

Molina Healthcare Inc. (MOH) reported second-quarter operating earnings of 62 cents per share, beating the Zacks Consensus Estimate of 43 cents.

Zacks Rank

Health Net presently sports a Zacks Rank #1 (Strong Buy).

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