Molina Maintained at Neutral - Analyst Blog

We are maintaining our Neutral recommendation on Molina Healthcare Inc. ( MOH ) based on increased membership, higher premium and service revenues, record-high operating cash flows and a strong financial position. However, we remain cautious about the rising medical costs. Underperformance in the prime Texas market is also a big concern.

Molina reported first-quarter 2012 earnings per share of 39 cents, which was a penny ahead of the Zacks Consensus Estimate as well as the year-ago earnings. Net income for the quarter came in at $18.1 million, compared with $17.4 million in the prior-year quarter.

Molina has been witnessing a steady increase in premium revenues over the past several quarters. Premium revenue increased to $4.60 billion in 2011 from $2.46 billion in 2007. Moreover, the increased premium rates in Florida and Michigan will positively impact revenue in 2012.

Additionally, the Ohio Department of Job and Family Services' ruling in favor of Molina and its endorsement of a new Medicaid managed care provider agreement to the company will prevent a decline of 248,000 in enrollment and a loss of $988.9 million in premium revenue.

Molina's strong revenues earned it a place on the 2012 Fortune 500 list. Expansion of the membership base is a prime reason for the increase in revenue. Aggregate membership increased 11% from the first quarter of 2011, and currently Molina serves nearly 1.8 million members. Additionally, the company's enrollment in the Medicare special needs plan, for dual-eligible members, is the eighth-highest in the U.S.

However, Molina lost a couple of important Medicaid contracts recently, which are expected to substantially reduce its membership base, thereby hampering revenue growth. Loss of the Missouri Medicaid contract is expected to reduce membership by about 79,000.

Moreover, higher-than-expected medical claims in Texas have led to the withdrawal of Molina's 2012 earnings guidance as well as a medical cost ratio (MCR) of 120% for the STAR+PLUS plan in the two new Texas markets - Hidalgo and El Paso.

This means that the premium revenues from these markets are not enough to cover the medical costs, thus leading to losses. High MCR in the new markets also increased the MCR for Texas to about 100%, while the MCR for the rest of the state is around 93%.

Molina competes with WellPoint Inc. ( WLP ) and UnitedHealth Group Inc. ( UNH ). The company currently carries a Zacks #3 Rank, implying a short-term 'Hold' rating.

MOLINA HLTHCR (MOH): Free Stock Analysis Report

UNITEDHEALTH GP (UNH): Free Stock Analysis Report

WELLPOINT INC (WLP): Free Stock Analysis Report

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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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