We have retained our Neutral recommendation on
Molina Healthcare Inc.
) despite impressive second quarter results due to rising medical
costs, declining investment income and the negative impact of the
healthcare reforms. This multi-state managed care organization
carries a Zacks Rank #3 (Hold).
Why the Reiteration?
Molina's operating earnings for the second quarter of 2013 came
in at $0.34 per share, surpassing the Zacks Consensus Estimate by
9.7%. Results also rebounded from the year-ago quarter's loss of
$0.71 per share.
Molina's robust growth in premium and service revenues,
investment income and rental income are the highlights of the
strong second-quarter. Premiums have been increasing over the
past few years and contributing to the increased revenues.
The first half of 2013 witnessed the same trend driven by
membership growth in Wisconsin and Washington as well as higher
rates in Texas and Washington in the second half of 2012. The
second largest component of revenues viz. service revenues also
surged in the first half keeping up with the drift over the past
Membership of Molina is expected to be boosted by the Lovelace
Community Health Plans contract for the New Mexico Medicaid
Salud! Program as it will transfer Lovelace's Medicaid members to
the Centennial Care Program in New Mexico, of which Molina is a
Furthermore the acquisition initiatives of Molina aimed at
expanding its geographic reach are impressive. Of particular
importance are the acquisition of Health Information Management
and Abri Health. The pending acquisition of certain assets of
Community Health Solutions is also expected to bolster its
growing membership. In addition, despite the cash outlays for
inorganic growth, Molina holds a healthy balance sheet.
On the tepid side rising medical care costs and hence overall
operating expenses has been posing a risk to the operating
leverage of the company and weighing on margins. Also, upcoming
changes like a ban on annual and lifetime coverage caps, annual
fees on health insurance companies and excise tax on high premium
insurance policies, will likely increase expenses further.
Moreover, the low interest rate environment has been dragging
down investment income of the company and thus Molina needs to
hedge its investment portfolio from market fluctuations to
prevent further decline.
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Other Stocks to Consider
Other healthcare companies that are worth considering are
UnitedHealth Group Inc.
). All these stocks carry a favorable Zacks Rank #2 (Buy).