We maintain our 'Neutral' recommendation on
Molina Healthcare Inc.
) based on revenue growth, rising membership, strong operating cash
flows and inorganic expansion. However, we remain cautious about
the impact of rising medical costs and weak interest rates.
Molina reported second-quarter 2012 net loss per share of 80
cents, which was far behind the Zacks Consensus Estimate of
earnings of 4 cents as well as the year-ago earnings of 38 cents.
Net loss for the quarter came in at $37.3 million compared to net
income of $17.4 million in the prior-year quarter.
Molina has been witnessing a steady increase in premium revenues
over the past several quarters. Premium revenues surged 27.6% year
over year to $2.82 billion in the first half of 2012. Also
contributing to the increased revenues are more care intensive
benefits and related higher premiums associated with the Aged,
Blind or Disabled and Medicare members. Moreover, the efforts to
trim down utilization and unit costs are expected to boost
profitability by $6.6 million per month till the end of 2012.
The widening of the membership base is also a prime reason for
the increase in revenue. Moreover, Molina has been expanding its
geographic reach via acquisitions.
Further, Molina holds a healthy balance sheet with a steadily
improving cash flow. The consistently rising cash flow trend is the
result of increasing operating efficiency as well as higher premium
income, along with the impact of deferred revenue. A long-term
trend of rising cash from operations bodes well for the company, as
it also paves the way for efficient capital deployment.
On the flip side, Molina lost a couple of important Medicaid
contracts in the last few quarters, which are expected to
substantially reduce its membership base, thereby negatively
impacting revenues. Loss of the Missouri Medicaid contract in March
2012 is expected to reduce Molina's membership by about 79,000
Investment income, another prime component of Molina's revenue,
has been declining since 2007, primarily due to low interest rates.
Additionally, rising medical costs are compressing margins.
Moreover, higher-than-expected medical claims in Texas forced
Molina to withdraw its 2012 earnings guidance in June 2012. Going
ahead, any substantial elevation in operating expenses and medical
costs could weigh heavily on margins and the bottom line.
Molina competes with
Wellcare Health Plans Inc.
). The company currently carries a Zacks #3 Rank, implying a
short-term 'Hold' rating.
CENTENE CORP (CNC): Free Stock Analysis Report
MOLINA HLTHCR (MOH): Free Stock Analysis Report
WELLCARE HEALTH (WCG): Free Stock Analysis
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