We are downgrading our recommendation on Health Net, Inc. (HNT) to Underperform from Neutral on the back of disappointing first-quarter results. Health Net’s financial leverage deteriorated with higher debt-to-total capital ratio and lower shareholders equity.
Health Net’s first-quarter 2012 earnings lagged the Zacks Consensus Estimate due to a substantial decline in revenue. This primarily resulted from lower revenues in the Government Contracts segment due to the new T-3 TRICARE North contract, which restricted the earnings that could be recognized.
Our six-month target price of $23.00 per share equates to about 10.1x our earnings estimate for 2012. With no dividend to supplement, this target price implies an expected negative return of 10.4% over that period, which is consistent with our Underperform recommendation on the shares.
