Molina Outshines Zacks Estimates - Analyst Blog

Molina Healthcare Inc. (MOH) reported its third quarter income from continuing operations of $16.2 million or 57 cents per share, surpassing the Zacks Consensus Estimate of 49 cents. 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's reported results were much higher than the income of $8.6 million or earnings of 33 cents in the year-ago quarter.

Quarterly Results

Total operating revenues in the reported quarter climbed 13.4% year over year to $1.04 billion, which exceeded the Zacks Consensus Estimate of $1.03 billion. Molina's investment income also surged to $1.8 million from $1.7 million a year ago.

Premium revenues of Molina in the third quarter of 2010 increased 9.9% to $1.01 billion. The rise was attributable to an approximately 13% year-over-year rise in enrollment in the reported quarter. However, premiums revenue was flat on a PMPM basis, due to the impact of premium reductions tied to the elimination of the pharmacy benefit in Ohio and Missouri.

These reductions were offset by increased Medicare enrollment and higher Medicaid rates, exclusive of the pharmacy cuts in Ohio and Missouri. Exclusive of the pharmacy cuts, premium revenue PMPM increased approximately 6.4%.

Total expenses in the quarter climbed approximately 12.0% to $1.01 billion. Medical care costs came in at $845.9 million as against $792.8 million in the year-ago quarter, up approximately 6.7%. The medical care ratio (percentage of premiums paid to cover medical claims) in the quarter decreased to 84.2% from 86.7% in the year-ago quarter.

General and administrative (G&A) expenses rose to $88.7 million from $68.6 million in the year-ago period. The expenses related to depreciation and amortization climbed approximately 21.6% year over year to $12.0 million. Interest expenses also increased from $3.3 million to $4.6 million in the third quarter of 2010.

Molina exited the quarter with $426.5 million in cash and cash equivalents as against $449.5 million at the end of the third quarter of 2009.

As of September 30, 2010, Molina had total assets of $1.4 billion and shareholders' equity of $697.7 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 2.3 million shares to the weighted average number of common shares outstanding for the three months ended September 30, 2010.

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 $1.2 million to Molina's operating income during the third quarter of 2010, resulting in an operating profit margin of approximately 4%.

However, as Molina expected in the last quarter, the operating profit for Molina Medicaid Solutions declined in the reported quarter as a result of the revenue and cost recognition that commenced in Maine as of its September 1, 2010, "go-live" operational date.

In addition and contrary to expectations, the consulting and outside service costs for both Idaho and Maine following their respective go-live operational dates have not declined from their pre-operational levels.

Further, to expand its geographic reach, Molina completed its acquisition of Abri Health Plan, which provides Medicaid managed care services to BadgerCare Plus and SSI Managed Care enrollees in Wisconsin, on September 1 for approximately $16 million, subject to adjustments. As of September 30, 2010, Abri Health Plan served approximately 28,000 Medicaid members in 23 counties in Wisconsin.

Comparison with Competitors

Molina's competitor Unitedhealth Group Inc. (UNH) reported its third quarter results on October 19, 2010. Unitedhealth's third-quarter income from continuing operations was $1.14 per share, substantially better than the Zacks Consensus Estimate of 84 cents. This also compares favorably with 89 cents in the year-ago period.

Other rivals of Molina, such as Aetna Inc. (AET), Coventry Health Care Inc. (CVH), WellPoint Inc. (WLP) and Humana Inc. (HUM) are yet to report their third quarter results.

Guidance for Fiscal 2010

Molina has further enhanced its earnings expectation for full year 2010 to $1.90 from $1.70, with increased expectation for net income at $52.7 million from $47.1 million, as expected previously on September 14.

Further, Molina's total operating revenue guidance was also raised for 2010 and it currently includes premium and service revenue of $4.1 billion and $94.0 million, respectively, with investment income of $6.7 million.

In addition, Molina has revised its 2010 guidance for several items including medical care costs of $3.4 billion and service costs of $82.5 million. Molina also guides expense items for 2010 including G&A expense of $333.9 million, premium tax expense of $140.3 million, depreciation of $27.1 million, amortization of $18.5 million and interest expense of $15.8 million.

Molina further expects an income tax expense of $32.3 million for 2010 at a tax rate of 38.0%.

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 has offered health plan services in Medicaid markets all over the country, which has contributed significantly to the growth of Molina. 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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