Molina Healthcare Inc. (MOH) reported its fourth quarter income from continuing operations of $17.6 million or 58 cents per share, beating the Zacks Consensus Estimate of 51 cents. Molina’s fiscal year 2010 also posted strong earnings of $55.0 million or $1.98 per share, exceeding the Zacks Consensus Estimate of $1.91.

The better-than-expected results in the quarter were driven by higher operating revenues coupled with ramped-up enrollment and increased focus on medical costs.

Also, Molina reported a net loss of $4.5 million or 18 cents per share in the fourth quarter of 2009 and a net income of $30.9 million or $1.19 per share in fiscal 2009.

Quarterly Results

Total operating revenues in the reported quarter climbed 12.1% year over year to $1.08 billion, but lagged the Zacks Consensus Estimate of $1.13 billion. Operating revenues in 2010 were $4.09 billion, up 11.4% year over year. However, it was way behind the Zacks Consensus Estimate of $4.13 billion.

Molina’s investment income plummeted to $1.4 million in the quarter from $1.8 million a year ago, while it declined to $6.3 million in 2010 from $9.1 million.

Premium revenues of Molina in the fourth quarter of 2010 increased 8.4% to $1.04 billion. The rise was attributable to an approximately 10.9% year-over-year rise in enrollment in the reported quarter.

However, premiums revenue plummeted 3% year over year on a PMPM basis, due to the decline in premium rates. Premium revenues in the year 2010 climbed 9% to $4.0 billion, aided by a membership increase of 10.9%. However, premiums revenue declined 2.1% year over year on a PMPM basis.

The decrease in the fourth quarter and fiscal year 2010 was primarily due to the transfer of the pharmacy benefit to the state fee-for-service program in Ohio effective February 1, 2010. The fiscal year 2010 was also impacted by the transfer in Missouri effective October 1, 2009.

Exclusive of the transfer, Medicaid premium revenue on a PMPM basis was unchanged in the fourth quarter, while it increased approximately 1.5% from 2009.

Total expenses in the quarter climbed approximately 8.0% to $1.05 billion, while it rose 10.0% to $4.0 billion in fiscal 2010.

Medical care costs came in at $862.5 million as against $842.4 million in the year-ago quarter, up approximately 2.4%. In fiscal year 2010, the medical care costs increased 6.1% year over year to $3.4 billion. The medical care ratio (percentage of premiums paid to cover medical claims) in the quarter decreased to 82.7% from 87.5% in the year-ago quarter, while it declined to 84.5% from 86.8% in 2009.

General and administrative (G&A) expenses rose to $100.4 million in the quarter from $77.0 million, while expenses related to depreciation and amortization climbed approximately 29.3% year over year to $12.5 million. Interest expenses however reduced from $3.9 million to $3.5 million in the fourth quarter of 2010.

G&A expenses in 2010 increased to $346.0 million from $276.0 million, while depreciation and amortization expenses jumped 19.9% year over year to $45.7 million. Interest expenses also grew from $13.8 million to $15.5 million in the year 2010.

Molina exited the year 2010 with $771.7 million in cash and cash equivalents, including non-current auction rate securities with a fair value of $20.4 million. At the end of December 31, 2010, the parent company had unrestricted cash and investments of $65.1 million, including auction rate securities of a fair value of $6.0 million.

As of December 31, 2010, Molina had total assets of $1.51 billion and shareholders’ equity of $719.1 million.

Equity Offering

Molina also issued 4,350,000 shares by way of an equity offering in the third quarter of 2010. The offering added approximately 1.7 million shares to the weighted average number of common shares outstanding for the year ended December 31, 2010.

Acquisition Update

Molina’s acquisition of the business of Unisys Corporation (UIS), which is currently operating under the name Molina Medicaid Solutions in May, 2010, has contributed $2.6 million to Molina’s operating income during the year 2010. However, it contributed an operating loss of $3.6 million in the quarter, primarily due to the result of system stabilization costs incurred for two of Molina Medicaid Solutions’ contracts.

Comparison with Competitors

Molina’s competitor Unitedhealth Group Inc. (UNH) reported its fourth quarter results on January 20, 2011 with income from continuing operations of 94 cents per share, better than the Zacks Consensus Estimate of 90 cents. This also compares favorably with 81 cents in the year-ago period.

The other rival of Molina, such as Aetna Inc. (AET) reported its fourth quarter results on February 4, 2011 with earnings of 63 cents per share, better than the Zacks Consensus Estimate. The company had earned 40 cents in the prior-year quarter.

Coventry Health Care Inc. (CVH) reported its fourth quarter results on February 8, 2011 with adjusted earnings of 96 cents per share, exceeding the Zacks Consensus Estimate of 89 cents.

WellPoint Inc. (WLP) also surpassed the Zacks Consensus Estimate of $1.21 and reported its fourth-quarter income from continuing operations of $1.33 per share on January 26. This also compares favorably with income of $1.16 in the year-ago quarter.

Guidance for Fiscal 2011 and 2012

Molina has resumed its guidance for fiscal 2011 and 2012, issued on January 26, with earnings expectation of $2.20 for 2011, with expectation for net income at $68.2 million.

Further, Molina expects its 2011 premium and service revenue of $4.5 billion and $170.0 million, respectively, with investment income of $7.5 million.

In addition, Molina has provided its 2011 guidance for several items including medical care costs of $3.8 billion and service costs of $145.0 million. Molina also guides expense items for 2011 including G&A expense of $390.0 million, premium tax expense of $145.0 million, depreciation of $34.0 million, amortization of $20.0 million and interest expense of $15.0 million.

Molina further expects an income tax expense of $41.8 million for 2011 at a tax rate of 38.0%.

For fiscal 2012, Molina expects premium revenue in the range of $5.0 billion to $6.0 billion, with medical care ratio in the range of 85.0%-85.5%.

Our Recommendation

Molina is well-positioned with improvements across its business lines, despite a challenging premium rate environment. Molina has impressive revenue growth, increasing scale and disciplined cost management along with the ability to build a strong portfolio in the industry.

Molina is also on track with expansion plans via acquisitions. Molina’s Medicaid health plan business has advanced its strategic plan by expanding its services and product offerings beyond managed care.

We believe that the strategy of growth through acquisitions, increasing revenues and improved guidance will be able to attract long-term investors.

 
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