Molina Healthcare Q3: Robust Growth Potential Yet Underrated Compared To Peers

Investment action

I recommended a buy rating for Molina Healthcare, Inc. (NYSE:MOH) when I wrote about it the last time, driven by my belief that the market was undervaluing its evident potential for growth. After a thorough review of MOH’s third quarter results, my conviction has only strengthened. The company has showcased robust growth, and its effective cost management strategies are yielding discernible positive results. Additionally, MOH’s strategic endeavors, focused on broadening its market presence and enhancing its service portfolio, further underscore its promising prospects. Based on these insights, I maintain my buy rating for MOH.

Review

MOH reported on October 26th robust financial performance in the third quarter of 2023. The company reported adjusted earnings per diluted share of $5.05, reflecting a commendable growth trajectory. This figure represents a 16% increase year-over-year, underscoring the company’s ability to enhance shareholder value and its consistent profitability.

Furthermore, revenue for this quarter grew 7.83% year over year, reaching $8.55 billion. The revenue growth was driven by several key factors. Firstly, there was a noticeable uptick in the utilization of various healthcare services, particularly outpatient, professional, and in-home services. This increase in demand was not only met effectively by MOH, but also strategically leveraged in their 2024 bids and benefit designs, ensuring that they capitalized on this growing market segment.

Additionally, the company’s Marketplace segment demonstrated remarkable performance, with a Medical Care Ratio [MCR] of 78.9%. This success can be attributed to MOH’s strategic pricing decisions, which were aimed at achieving target margins in this segment. The focus on silver and renewal members played a crucial role in this achievement, contributing to a robust risk adjustment performance. As a result, MOH is on track to surpass its target margins for the year, indicating a strong financial position.

In addition to strong revenue growth, MOH’s effective cost management in the third quarter of 2023 was evident in several key areas. The company reported a consolidated MCR of 88.7% for the quarter, which is a crucial metric in the healthcare industry that represents the percentage of premium revenue spent on medical services and care. This figure demonstrates MOH’s ability to manage its medical costs effectively. In the Medicaid segment, the reported MCR was slightly higher at 88.8%. This MCR figure included the impacts from the net effect of redetermination acuity shifts and corridors in several states, indicating that the company was able to manage these shifts without significant cost overruns. Additionally, the MCR for the quarter was slightly influenced by a provisional retroactive rate adjustment in New York State. Across the Medicaid segment, the major medical cost categories remained largely in line with the company’s expectations, showing consistency in cost management. There were only normal quarter-to-quarter trend fluctuations, further emphasizing the company’s ability to predict and control its costs. In the Medicare segment, the reported MCR was 92.4%, which was above the company’s long-term target range, indicating some areas of increased costs in this segment.

MOH’s growth initiatives in the third quarter of 2023 were marked by several strategic moves aimed at expanding their footprint and enhancing their service offerings. One of the significant milestones was the implementation of their new contract in California. This contract is expected to nearly double the size of their current membership in the state, adding approximately $2 billion in annual premium, and is set to commence on January 1, 2024.

In Texas, MOH finalized their contract for the STAR+ program, retaining their entire existing footprint. With several new entrants expected to have a lower share, MOH anticipates an increase in their membership share in the state, which would drive an incremental annual premium revenue of approximately $400 million. July 2023 saw the successful launch of MOH’s health plan in Iowa, serving approximately 180,000 members, in line with their expectations. Furthermore, their Nebraska implementation is on track for a successful launch on January 1, 2024, which is projected to contribute an estimated annual premium of $600 million. Additionally, in August, MOH announced their return to serving Medicaid beneficiaries in New Mexico, marking their re-entry into a state where they previously had a presence. This move signifies their commitment to expanding their Medicaid business and reaching out to more beneficiaries.

Valuation

I believe MOH will grow at an approximate rate of 5% in FY23. This growth projection is anchored on the management’s provided EPS guidance, which stands at a minimum of $20.75. By considering this EPS in conjunction with the current number of outstanding shares, I can estimate the company’s net income. With a projected net margin increase of 3.6%, I can further derive the company’s revenue. The anticipated expansion in net margin to 3.6% is a testament to MOH’s effective cost management, especially as evidenced in the third quarter.

Looking ahead to FY24, I forecast a growth rate of 14%, aligning with prevailing market expectations. The commendable performance of MOH in the third quarter, which saw significant growth in both EPS and revenue, supports this upbeat outlook. Moreover, the strategic initiatives that MOH has embarked upon, as previously discussed, place the company in a strong position for continued growth in the coming years. In essence, MOH has showcased its robustness and adaptability. With its forward-thinking initiatives and a promising market outlook, the company is poised to harness tailwinds for success rather than face headwinds.

MOH is currently trading at approximately 14x forward P/E, while its peers have a median of around 16.2x. When examining MOH’s financial metrics, its 3% net margin aligns closely with the peers’ median of 4%. However, MOH stands out with a projected next twelve months [NTM] growth rate of 12%, surpassing the peer median of 8%. Additionally, MOH’s Year2/Year1 NTM growth rate is anticipated to be 9%, which is slightly higher than the peer median of 8%. Given these factors, I argue that MOH’s forward P/E should align with the peers’ median of approximately 16.2x. By applying this forward P/E ratio, my estimated price target for MOH is around $404. This projection indicates a potential capital appreciation of 20%. Based on this analysis and the company’s promising outlook, I maintain my buy rating for MOH.

Risk and final thoughts

One downside risk to my buy rating is that MOH operates in a highly regulated environment. Changes in healthcare policies, especially those related to Medicaid and Medicare, can have significant implications for the company’s revenue and profitability. Unanticipated reforms or reductions in government-sponsored healthcare programs could diminish the number of insured individuals or lower the reimbursement rates, directly impacting MOH’s financial performance. Moreover, unexpected regulatory shifts or more stringent compliance mandates can escalate operational costs. Given the dynamic nature of healthcare regulations and potential political changes, regulatory uncertainties pose a tangible risk for MOH.

MOH’s impressive financial performance in the third quarter underscores its consistent growth and profitability. The company effectively capitalized on the increased demand for healthcare services, particularly in the outpatient and in-home sectors, strategically positioning itself for future opportunities. The remarkable performance of the Marketplace segment, driven by effective pricing decisions and a focus on specific member categories, further solidifies MOH’s strong financial stance. Effective cost management, demonstrated by consistent MCR metrics, highlights the company’s ability to manage medical costs and navigate regulatory complexities. Strategic growth initiatives, including new contracts and expansions, reflect MOH’s commitment to broadening its reach and enhancing its offerings. Moreover, when compared to its peers, MOH’s forward P/E appears low, given its superior growth projections and comparable net margins. Considering these factors, along with the potential for significant capital appreciation, I maintain my buy rating for MOH.