Molina Healthcare: Why recent pressure has been unfounded
Investor day could provide a positive update to long-term growth
MOH has been under pressure of late, without much reason. After beating 2Q consensus EPS estimates, even after including roughly $0.12 per share in one-time costs, the stock is down roughly 11% from pre-earnings levels, which presents an excellent entry point. MOH is hosting a semi-annual investor day on September 19. Based on recent developments since its previous investor day in February, the company may provide a positive update with respect to its long-term revenue guidance. In addition, MOH may provide additional color on various state payment rates, which should be positive, and the California dual eligible program, among other things. With little explanation for the stock’s recent weakness, this catalyst should reinvigorate the stock, which is trading at a discount to its historical levels.
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2014 estimates are too low
2014 consensus reflects an overly cautious view of operations. While some degree of conservatism is appropriate given the rapid revenue growth, estimates appear to be implying an unreasonable degree of caution on margins. The “bridge” from 2013 guidance makes this apparent. Included in MOH’s guidance of $1.55 in EPS (earnings per share) is roughly $0.60 per share in preparatory costs related to either the Obamacare expansion or new contract implementations. Of the $0.60 per share in preparatory costs, roughly half ($0.30 per share) is not expected to recur in 2014. Off of that EPS base of $1.85, MOH should grow revenue by roughly $3 billion in 2014—between typical organic growth, Medicaid expansion via Obamacare, the new dual eligible contract in California, and other new contracts. Even assuming lower-than-typical margins on the new business, the revenue growth equates to roughly $0.80 per share in incremental earnings in 2014, equating to 2014 EPS of $2.65 ($1.55 + $0.30 + $0.80 = $2.65), well above consensus $2.28. The company will provide an initial view of 2014 guidance either on its 4Q13 conference call or during its winter investor day in February.
3Q earnings should be strong
Hospital admission surveys in 2Q showed year-over-year deterioration, which led to meaningful earnings shortfalls in for publicly traded hospital companies. Lower utilization should benefit HMOs’ gross margins, as it suggests medical costs may be lower than anticipated. These trends appear to have continued into 3Q. In addition, MOH is facing easy comparisons relative to flu-related costs, given the intensity of last year’s season.
The Market Realist Take
On its Investor Day, MOH announced a tentative risk-sharing agreement with California’s Department of Health Care Services (DHCS). MOH didn’t disclose the exact margin target or total dollar potential pending final approval, but said the four-year arrangement slated to begin January 1 is structurally similar to Health Net Inc.’s (HNT) deal, where the state absorbs a portion of any shortfall versus a 3.25% margin for combined Medicaid and duals business up to a multi-year cap of $264 thousand. DHCS has agreed to extend several of Molina’s Medi-Cal contracts, and the settlement will resolve several Medi-Cal rate disputes with DHCS dating back to 2003.