Ahead of the Bell: Aetna and Health Net skid

Matthew Borsch downgraded the stocks to "Sell" from "Neutral" and put Health Net on the Americas Conviction Sell List. He said both companies will face lower profit margins in the next few years, which will hurt their earnings, and said Health Net does a lot of business in areas where results have been weak.

Health Net shares dropped $2.64, or 10.3 percent, to $23 in premarket trading, down from Wednesday's closing price of $25.64. The stock last traded at $23 on Oct. 26, 2004. Aetna shares fell $1.27, or 3.3 percent, to $38.52 premarket. The stock closed at $39.79 Wednesday and set an 18-month low during the session.

Many health insurers have cut their profit forecasts this year, including UnitedHealth Group Inc., which on Wednesday reduced its expectations for the second time. UnitedHealth said competition is leading to lower premiums and profit margins. Borsch believes that is the most important issue facing the industry, and he expects margins to continue falling over the next two years.

He lowered his profit estimates for Health Net through 2010, and he cut his price target on the shares to $15 from $31. He said Health Net's business is concentrated in several areas that UnitedHealth cited as particularly difficult.

Aetna has been a notable holdout in the sector, as unlike UnitedHealth, Coventry Health Care Inc., Cigna Corp., Humana Inc., and others, Aetna has not lowered its expectations this year. The company most recently backed its annual outlook on June 19, forecasting an adjusted profit of $4 per share.

But Borsch said Aetna can't hold off lower margins indefinitely. He lowered his 2009 and 2010 profit estimates and cut his price target to $36 per share from $48.

The analyst has rival insurer Humana Inc. on his Conviction Buy List.

Aetna and Health Net did not immediately return calls seeking comment.