On Jul 10, 2014, we issued an updated research report on
Molina Healthcare Inc.
). We believe that the implementation of the health plans in
various states, growth of new contracts and increased membership
across its health plans position the company to generate higher
revenues going forward.
Notably, Molina Healthcare has increased its membership base
through creation of new health plans and development of the
existing ones, thereby increasing premium revenues. The acquisition
of the Lovelace Community Health Plan contract and the State
Coverage Insurance (SCI) program of New Mexico have also
contributed to membership increase. Additionally, going forward,
Molina Healthcare's ability to offer certified Qualified Health
Plans (QHPs) on the California Health Benefit Exchange and
selection by Covered California should boost its membership in
The health plans of Molina Healthcare like those in California,
Ohio, New Mexico, Washington and South Carolina resulted in
increased membership effective Jan 2014, as these were selected to
take part in the dual-eligible demonstration projects. While the
Illinois health plan commenced serving dual-eligibles in Mar 2014,
the rest are expected to begin serving these members by 2014 and
Moreover, this Zacks Rank #1 (Strong Buy) stock has been witnessing
a steady increase in premiums and service revenues over the past
several years. Furthermore, with the approval of the Medicaid
expansion in Ohio (fourth largest health plan in terms of
enrollment), memberships and consequently, revenues are expected to
Molina Healthcare has been expanding its geographic reach through
acquisitions and has thereby been helping to consolidate the
industry. Acquisition of entities like Health Information
Management, Abri Health Plan and Community Health Solutions of
America Inc. has aided membership growth. In addition, despite the
cash outlays for inorganic growth, Molina Healthcare has a healthy
balance sheet with a steadily improving cash flow.
On the flip side, management remains cautious about rising medical
care costs, which are compressing margins. Total medical care costs
are expected to increase in 2014, due to which medical care ratio
could deteriorate. Further, certain provisions of the U.S. Health
Care Reform Act like the establishment of minimum medical loss
ratios, restriction on charging higher premiums from patients with
pre-existing medical conditions and the burden of an annual fee or
excise tax by the ACA on health insurers (health insurance fee) are
likely to increase expenses for the company.
Additionally, investment income, a prime component of Molina
Healthcare's revenues, has been declining since 2007 primarily due
to lower interest rates. Although it increased in the last reported
quarter, investment income remains vulnerable to the low interest
Other Stocks to Consider
Other players that look attractive at current levels include
WellCare Health Plans, Inc.
). While WellCare has the same Zacks Rank as Molina Healthcare,
Aetna and Humana have a Zacks Rank #2 (Buy).
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