Equity research: Molina Healthcare, Inc.

Part 2
Equity research: Molina Healthcare, Inc. (Part 2 of 4)

Molina Healthcare: Why Molina’s revenues have been growing fast

Molina Healthcare, Inc. (MOH): Revenue growth

In general, Medicaid health plans grow revenue by increasing their membership or generating higher rates from state governments. The latter portion is often left up to negotiations between plans and states. States often have the final say, but given cost savings managed care can generate, they are loathe to bring rates so low that plans will not want to participate. In terms of membership, growth can be achieved through two ways: by an increase in Medicaid-eligible lives within the plan’s existing footprint, or by successful contract procurement, either in a new market or within an existing one.

MOH MembershipEnlarge Graph

For example, MOH entered the state of Texas in 2007 and in May 2010 was awarded a contract to serve Medicaid managed care patients in the seven-county Dallas service area. In September 2010, MOH won an additional contract to administer the CHIP program in 174 predominately rural counties across the state. During the 2012 state expansion, MOH added three new service delivery areas. More recently, the company has also expanded its OH footprint, and effective June 01, 2013, would be expanding into 38 new counties. MOH will also be entering the state of Illinois in 2013. As a result, its membership has been growing at a CAGR (compound annual growth rate) of 9% from 2007 to 2012. MOH’s major contributor, TANF and CHIP, has been growing relatively slower, at a CAGR of 7% (2007–2012) while the smaller ABD and Medicare Advantage segments have witnessed rapid growth, recording CAGRs of 24% and 48%, respectively, during the same period.

As a result of this member growth, revenues have been growing rapidly as well. Note that this should accelerate in 2014, driven by the onset of Obamacare and a large California-based contract set to begin in April of next year.

MOH RevenueEnlarge Graph

Margin profile

By design, government-sponsored healthcare programs, particularly health plans, have low margins. Publicly traded Medicaid HMOs often characterize their Medicaid businesses as having pretax margins in the 3% to 5% range over the long term. Except for 2009 and 2012, MOH’s gross margins have been trending in the mid-teen range. Sudden increases in healthcare utilization levels led to lower trending gross margins in these years. Barring 2009 and 2012, MOH’s operating margin has been in the 3%-to-4% range (Exhibit 5). A relatively high 14% YoY increase in 2009 G&A (general and administrative) expenses was one of the primary factors behind a significant boost in operating expenses, leading to a significant drop in FY 2009 operating earnings. In 2012, the company witnessed exceptionally high utilization, especially in the newly expanded Texas region, leading to lower operating margins. While this can be painful initially, as Medicaid plans have small margins to begin with, it’s often quickly corrected, as states will incorporate that higher cost trend into their assumptions for future rate payments.

The Market Realist Take

In 2Q 2013, the company saw a revenue growth of 8%, a medical care ratio that declined 830 basis points, and net income from continuing operations that increased to $16 million—up from a net loss of $33 million for the same period in 2012. The company announced that it expects net income per diluted share from continuing operations to be $1.55 for all of 2013, and net income per diluted share, including discontinued operations, to be $1.72 for all of 2013.

On its September Investor Day, the company said that overhead without revenue from delayed new business launches will drag on earnings in the near term. But it expects revenue to reach $12.5 billion by 2015 (versus $12 billion previously), as lowered expectations for dual eligibles (with California rates likely to be at the low end of expectations) are offset by recent acquisitions and contract wins.

UnitedHealth Group Inc. (UNH), WellPoint Inc. (WLP), Health Net Inc. (HNT), Centene Corp. (CNC), Humana Inc. (HUM), Cigna Corp. (CI), and Aetna Inc. (AET) are Molina’s competitors.

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