Molina Healthcare Surges 80% YTD: Can the Rally Continue?

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Molina Healthcare, Inc.MOH stock has greatly benefited from the company's turnaround initiatives, which aided its margins and restored investors' confidence in the company.

The same is reflected in its share price, which has significantly soared 80% so far this year, outperforming the industry 's rally of 21.8%. The stock also zoomed ahead of other players in the industry. To put the same into perspective, shares of other major players, namely UnitedHealth Group Inc. UNH , Aetna Inc. AET and Anthem Inc. ANTM have also gained 21.8%, 10.7% and 17.8%, respectively.

Molina Healthcare on an average has outperformed its industry and other companies in the same space by nearly four times.

Molina Healthcare's administrative cost ratio decreased to 7.2% in the first half of 2018, led by a combination of consistent administrative cost containment and better-than-expected revenues. Further, the company is committed to harvest the benefits of administrative cost leverage over time.

Reasons Behind the Rally

The company sustained disappointing 2017 results, which saw a decline in margins, poor shareholder's returns, loss of two long-standing Medicaid contracts, dismal operational infrastructure, inefficient control over balance sheet and an indiscipline capital management. These induced the company to incur a net loss of $9.07 per share in 2017 compared with earnings of 92cents in 2016.

In response to this, the company undertook several measures for the stock's recovery such as, significant changes made to reprocurement process on renewal of its existing business in 2018. The company is restoring margins through operational improvements, particularly in G&A (general and administrative expenses), and enhancing the execution of managed care fundamentals.

To that end, Molina Healthcare has taken a closer look at its networks, processes, utilization and care management programs in a bid to effectively manage the innate upward pressure on medical costs. The company is seeking to optimize its revenue base by concentrating on sources of value and redirecting necessary investments in achieving target margins. Finally, the company instilling a strong balance sheet and a rigorous capital management discipline to take advantage of the attractive cash flows of its core business.

To drive its margins, Molina Healthcare already exited certain geographic areas and business lines, such as its clinic operations and specific geographies in the health insurance marketplace, which have impeded its ability to attain its target margins.

Molina Healthcare's results for the first half of 2018 indicate that the early stages of the company's margin recovery and sustainability plan are working. This is because the company's focus on managed care fundamentals and a more relentless performance management process are reflected in its increased earnings.

The company's Marketplace business, a pain in the recent past has continued to outperform the company's forecast in 2018. The price rises made by the company along with improved retention of risk adjusted revenues are producing promising results and are projected to outpace the company's pretax target margin of 4.6%.

Finally, the company has maintained focus on optimizing its capital structure and business portfolio. It has further reduced its debt, repaid the outstanding balance on a revolving line of credit, simplified its capital structure and also contracted to sell a non-core operating asset, Molina Medicaid Solutions, to generate additional excess cash at the parent company.

Molina Healthcare also revised its guidance for 2018 to a range of $7.15-$7.35 earnings per share on an increase of $3 at the midpoint of its previous expectation.

Will the Rally Continue?

Molina Healthcare is placed in the Medicaid industry, delivering immense scope for growth as growing retirement population and the migration of higher acuity Medicaid members into the managed care setting should drive demand for its services.

Moreover, the stock carries a favorable Value Style Score of B and a Zacks Rank #1 (Strong Buy). Our research shows that stocks with an impressive Value Style Score of A or B when combined with a bullish Zacks Rank of 1 or 2 offer best investment opportunities in the value investing space. You can see the complete list of today's Zacks #1 Rank stocks here.

The stock has seen the Zacks Consensus Estimate for current-year and 2019 earnings being revised 62.4% and 30.5% upward, respectively, over the past 30 days. This reflects analysts' optimism on the stock.

Moreover, the stock is attractively valued. Its forward 12-month price-to-earnings growth ratio of 1.3% is lower than the industry average of 1.4%, making it a lucrative bet.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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