Health-Care Opportunity

As the market soars, the number of stocks you could call "values" decreases. Against this backdrop, managed care provider Health Net (NYSE: HNT), with earnings up 117% in the latest quarter, sure looks like a value. So, why is it down 15% this morning?

The short story on today's action is that the company's guidance for 2004 was a less-than-expected $2.92 to $3.07 a share. Using the low-end estimate, the stock is trading for 9.7 times forward earnings. Humana (NYSE: HUM), which is roughly the same size as Health Net, trades for 11.5 times forward earnings using an average of analyst estimates.

Cash is king, and Health Net managed operating cash flow of $378 million in 2003. The company has used its strong cash flow partly to buy back its own stock, repurchasing 16.8 million (13%) of its shares since May 2002. Not only does this seem a worthwhile investment, but at very least it implies that the company likes its share price.

Balance sheets in the managed care group tend to carry a lot of cash because they collect premiums up front and pay for services later. At year-end, Health Net's cash and investments available for sale stood at $1.9 billion. Debt-to-capital stands at a conservative 23.5%, well below the company's 30% target.

If Health Net shows any weakness, it is in its profit margins. Giant UnitedHealth Group (NYSE: UNH) enjoys a 6.6% profit margin; Health Net earns a more modest 2.7%. At the same time, that beats Humana's 2.1%, PacifiCare Health Systems' (NYSE: PHS) 2.6%, and CIGNA's (NYSE: CI) 2.6%.

In an election year, health-care costs are always an issue. Barring any unforeseen political wave swamping the industry, Health Net offers patient investors reasonable margins, strong cash flow, and rising earnings. That adds up to value in my book, and it has today's sell-off looking a bit like a buying opportunity.

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Motley Fool contributor W.D Crotty does not own any of the stocks mentioned.