We have upgraded our recommendation on
Molina Healthcare Inc.
) to Outperform from Neutral, owing to the uptrend in premium and
service revenue along with improving membership. Additionally,
the company's strategy of expansion via acquisitions is
benefiting its Medicaid business.
Molina has been witnessing a steady increase in premium
revenues, which account for a majority of the revenues, over the
past several years. It increased 87% over the past four years
(2007-2011). Further, premium revenues surged 29% year over year
in the first nine months of 2012.
Service revenue, the second largest component of Molina's
revenue, has also been increasing gradually since 2010. The first
nine months of 2012 witnessed a year-over-year surge of 19%. As a
result of the increasing premium and service revenue, the
company's total revenue has also been improving steadily since
Moreover, Molina's membership has been increasing due to the
creation of new health plans and the development of the existing
ones. Aggregate membership increased 9% over the first nine
months of 2012 and currently, the company serves nearly 1.83
Molina holds a healthy balance sheet with a steadily improving
cash flow. It increased 130% in the first nine months of 2012 due
to higher medical claims and benefits from the Texas health plan
and higher deferred revenue.
However, management remains cautious about the rising medical
care costs, which are compressing margins. Medical care costs
have spiked dramatically by 84% in the four year period
(2007-2011). The first nine months of 2012 also witnessed the
Moreover, the higher-than-expected medical claims and an MCR
of 120% for the STAR+PLUS plan in two new Texas markets forced
Molina to withdraw its 2012 earnings guidance in June 2012. The
high operating expenses pose a risk to the company's operating
Molina currently carries a Zacks #3 Rank, implying a
short-term 'Hold' rating. Peer
Health Net Inc.
) carries a Zacks #2 Rank (Buy).
HEALTH NET INC (HNT): Free Stock Analysis
MOLINA HLTHCR (MOH): Free Stock Analysis
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