Molina Outshines Estimates - Analyst Blog

Molina Healthcare Inc. (MOH) reported its second quarter income from continuing operations of $10.6 million or 41 cents per share, surpassing the Zacks Consensus Estimate of 31 cents. The better-than-expected results in the quarter were driven by higher operating revenues coupled with lower medical care costs on a per-member per-month (PMPM) basis due to a mild flu season.

However, Molina’s reported results were much lower than the income of $14.6 million or earnings of 56 cents in the year-ago quarter.

Quarterly Results

Total operating revenues in the reported quarter climbed 7.7% year over year to $999.3 million. Premium revenues in the second quarter of 2010 increased 5.5% to $976.7 million. The rise was attributable to an approximately 10% year-over-year rise in enrollment in the reported quarter. The increase was partly offset by lower PMPM premium revenues due to the decline in premium rates at several of Molina’s health plans. Molina’s investment income plummeted to $1.6 million from $2.1 million a year ago. The sharp decline was attributable to lower interest rates.

Total expenses in the quarter climbed approximately 7.7% to $978.2 million. Medical care costs came in at $839.6 million as against $803.2 million in the year-ago quarter, up approximately 4.5%. However, Molina witnessed a 5.0% year-over-year fall in PMPM medical costs in the reported quarter due to a lower incidence of influenza-related illnesses.

The lower PMPM medical costs at Molina was also attributable to cuts in Medicaid fee schedules, the transfer of pharmacy costs back to the states of Ohio and Missouri and various contracting and medical management initiatives implemented by the Long Beach, California-based company. The medical care ratio (percentage of premiums paid to cover medical claims) in the quarter decreased to 86.0% from 86.8% in the year-ago quarter.

General and administrative expenses rose to $78.1 million from $65.0 million in the year-ago period. The expenses related to depreciation and amortization climbed approximately 1.1% year over year to $11.2 million.

Physician and outpatient costs in the second quarter of 2010 increased 2.0% year over year on a PMPM basis. Pharmacy costs (including the benefit of rebates and the health plans of Ohio and Missouri ) declined approximately 31%. PMPM and capitated costs plunged 20.0% PMPM.

However, Molina’s in-patient facility costs increased 6.0% year over year in the second quarter of 2010. Utilization as well as unit costs both increased marginally in the reported quarter as against the year-ago quarter.

Molina exited the quarter with $461.0 million in cash and cash equivalents as against $417.8 million at the end of the second quarter of 2009.

As of June 30, 2010, Molina had total assets of $1.4 billion and shareholders’ equity of $567.9 million.

Acquisition Update

On May 1, Molina acquired the Health Information Management (“HIM”) business of Unisys Corporation (UIS), which currently operates under the name Molina Medicaid Solutions. It has contributed $5.0 million to Molina’s operating income during the second quarter of 2010, resulting in an operating profit margin of approximately 24%.

However, Molina expects operating profit to decline as the contracts in Idaho and Maine reach the operational stage and deferred costs for those contracts begin to amortize. Molina also expects earnings accretion from the acquisition and had thus made an upwards revision to the earnings expectation for full year 2010 to $1.51 from $1.50 previously, including the results of Molina Medicaid Solutions.

Further, to expand its geographic reach, Molina agreed on July 12 to acquire Abri Health Plan, which provides Medicaid managed care services to BadgerCare Plus and SSI Managed Care enrollees in Wisconsin. The transaction will close by August 31, 2010 and Molina expects to offer health plan services in ten Medicaid markets all over the country after the completion of the deal.

Comparison with Competitors

Molina’s competitor Unitedhealth Group Inc. (UNH) reported its second quarter results on July 20, 2010. Unitedhealth’s second-quarter income from continuing operations was 99 cents per share, substantially better than the Zacks Consensus Estimate of 75 cents. This also compares favorably with 73 cents in the year-ago period.

Another rival, Aetna Inc. (AET) also reported a second quarter profit from continuing operations of 75 cents per share on July 27, well ahead of the Zacks Consensus Estimate of 73 cents. Aetna had reported a profit of 77 cents in the year-ago quarter.

Coventry Health Care Inc. (CVH) also posted second-quarter earnings of $1.01 per share on July 30, substantially exceeding the Zacks Consensus Estimate of 57 cents. This was significantly more than the income of 46 cents in the year-ago quarter.

Another competitor of Molina, WellPoint Inc. (WLP) reported its second-quarter earnings of $1.67 per share on July 28, surpassing the Zacks Consensus Estimate of $1.56 along with the prior-year quarter’s earnings of $1.50 per share.

Humana Inc. (HUM) too reported its second quarter earnings of $2.11 per share on August 2, well ahead of the Zacks Consensus Estimate of $1.63 and $1.67 in the year-ago quarter.

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. The acquisition of the HIM business has added value to Molina’s Medicaid health plan business and advanced its strategic plan by expanding its services and product offerings beyond managed care. Also, Abri health plan is expected to bring significant growth for Molina.

However, Molina suffers from plummeting investment income resulting from lower interest rates, along with rising medical costs. Moreover, we believe that Molina will not be able to escape the adverse impact of the US Health Care Reform Act of 2010 on its products and services.