Health Net (HNT) provided a strong outlook for 2010. The company expects earnings per share in the range of $2.30 to $2.40, higher than ours as well as the Street’s expectations. The guidance is based on the expectation that the pending sale of its Northeast businesses will close before year-end 2009. Following the better than expected earnings guidance for next year, Health Net’s shares touched a 52-week high of $23.79. Based on a flat membership growth compared to 2009, Health Net expects revenues in the range of $13- $13.5 billion.

We are pleased with the strong guidance, especially in a situation when high medical costs have forced Health Net to lower its 2009 outlook post third quarter results. The company now expects 2009 earnings per share in the range of $2.25 ? $2.30 compared to the earlier guidance of $2.25 ? $2.35. Although we were disappointed, we believe the current environment has forced the company to lower its outlook ? higher costs related to the spread of H1N1 virus and expansion of COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) membership by laid-off workers. Under COBRA, people can continue their employer sponsored insurance coverage even after they lose their jobs.

In addition to providing a strong outlook for 2010, Health Net announced the resumption of the stock repurchase program. The company used to follow a liberal policy of repurchasing shares to enhance shareholder value. Health Net has a $700 million stock repurchase program authorized by the Board of Directors. At the end of the third quarter of 2009, about $103.3 million of stock repurchase authorization remained. The company had decided to put this program on hold in Nov 2008 due to the uncertain financial environment. We had earlier expected that a recovery in the economic scenario will make Health Net withdraw its decision.

Health care companies such as Health Net, Aetna (AET), UnitedHealth (UNH) and WellPoint (WLP) are currently facing several headwinds – rising unemployment, uncertainty related to healthcare reform and increasing cost pressure among others. These companies are also worried about a provision requiring them to fix their medical-loss ratios at 90%. This means companies will have to shell out 90% of their premium income on medical benefits for policyholders. Higher ratios will hurt profitability.

Zacks Investment Research

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