Molina Healthcare Inc. (MOH) reported first quarter income from continuing operations of 56 cents per share, which came in substantially ahead of the Zacks Consensus Estimate of 46 cents and 41 cents reported in the year-ago quarter. Net income escalated to $17.4 million from $10.6 million in the prior-year quarter.

Results benefited primarily from higher-than-expected operating revenues coupled with ramped-up enrollment and increased focus on medical costs. This growth momentum was partially offset by increased expenses and the ongoing weak rate environment.

Quarterly Results

Total operating revenues in the reported quarter climbed 15.8% year over year to $1.12 billion, but were a tad lower than the Zacks Consensus Estimate of $1.143 billion.

Premium revenues increased 12.0% year over year to $1.08 billion, while it rose about 1% on PMPM basis, aided by a membership increase of 11%. The rise was attributable to an approximately 11% year-over-year growth in enrollment in the reported quarter.

Medicare premium revenue for the reported quarter surged to $85.4 million from $50.3 million in the year-ago quarter, while Medicare enrollment exceeded 24,000 members, as of March 31, 2011.

Moreover, Molina’s service revenue (Medicaid) came in at $36.7 million compared with nil revenue in the year-ago period, while investment income increased 4.8% year over year to $1.6 million.

Total expenses in the quarter climbed approximately 15.0% year over year to $1.09 billion, primarily driven by general and administrative (G&A) expenses that rose 19.7% year over year to $94.44 million, depreciation and amortization that escalated by 25.9% year over year to $12.7 million and Medicaid costs that were $31.2 million compared with nil cost in the year-ago period. Even premium tax expenses came in at $36.6 million against $34.5 million in the prior-year quarter.

Additionally, medical care costs increased 11.0% year over year to $913.5 million. The medical care ratio (percentage of premiums paid to cover medical claims) in the quarter declined to 84.5% from 85.3% in the year-ago quarter.

Besides, total medical care costs increased less than 1% PMPM, while medical care costs for Medicaid membership decreased by about 2% PMPM. However, effective income tax rate in the reported quarter was slightly lower at 37.2% versus 38.0% in the first quarter of 2010.

Financial Update

Molina exited the reported quarter of 2011 with $870.8 million in cash and cash equivalents. As of March 31, 2011, the parent company had cash and investments of $25.6 million.

Cash flow from operations came in at $82.4 million in the reported quarter, compared with cash outflow of $26.5 million in 2010. As of March 31, 2011, Molina had total assets of $1.58 billion and shareholders’ equity of $740.5 million.

Guidance

Management reaffirmed its guidance for fiscal 2011, expecting earnings of $2.20 per share with a net income expectation of $68.2 million. However, given the budget deficit in all the states of operation and the volatile rate environment, currently, Molina’s guidance does not warrant any adjustments since this economic condition is expected to persist at least through 2012.

Concurrent with the fourth quarter earnings’ release, the company had guided 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% in 2012.

Our Take

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 coupled with the ability to build a strong portfolio in the industry.

The company is also growing 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 guidance reiteration will be able to attract long-term investors.

While Molina’s competitor Unitedhealth Group Inc. (UNH) is expected to release its first quarter results before the market opens on April 21, 2011, another peer Coventry Health Care Inc. (CVH) is expected to announce its results before the market opens on April 29, 2011.

 
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