(By Balaseshan) BMO Capital Markets analyst Dave Shove upgraded rating of Health Net Inc. (NYSE: HNT) to "Market Perform" from "Underperform" based on the improved visibility around Medi-Cal contracting, with $23 price target.
While developing a risk corridor for the state-sponsored business will not shield the company from catastrophic loss, the mechanism should smooth results, providing better quarterly visibility to earnings, Shove noted.
The analyst has held an "Underperform" rating based on lack of visibility into Medi-Cal and commercial earnings. Third-quarter commercial results were free from the drag of adverse development, a positive for the operations.
Shove said the risk sharing arrangement created in California limits the near-term downside to earnings for Health Net. All of this leads him to upgrade the shares to "Market Perform".
The analyst's EPS estimates for HNT are $0.99 for 2012 and $2.25 for 2013. This implies massive earnings contraction in 2012 and more than 200% growth in 2013. The pricing ambiguity for duals may put his estimates in a range within 10% of actual performance.
HNT shares trade at 11.5 times the analyst's 2013 EPS estimate of $2.25. He believes HNT shares merit a forward price-to-earnings of 10 times, which produces a price target of $23.
HNT is trading down 1.12% at $25.55 on Thursday.