Yesterday, Molina Healthcare Inc. (MOH) reported second quarter operating earnings of 38 cents per share, which came in 2 cents ahead of the Zacks Consensus Estimate. Results were also substantially higher than 27 cents reported in the year-ago quarter. Net income soared up 64.2% to $17.4 million from $10.6 million in the prior-year quarter.
Results benefited primarily from higher-than-expected premium and Medicaid revenues coupled with ramped-up memberships. This growth momentum was partially muted by increased expenses and higher medical costs. Even the ongoing weak rate environment continue to affect the desired upside.
Quarterly Results
Total operating revenues in the reported quarter climbed 16.8% year over year to $1.17 billion, also exceeding the Zacks Consensus Estimate of $1.15 billion. Premium revenues augmented 15.6% year over year to $1.13 billion, while it rose about 5% on per-member-per-month (PMPM) basis, aided by a membership increase of 10%.
Medicare premium revenue for the reported quarter spiked to $95.5 million from $67.6 million in the year-ago quarter, while as on June 30, 2011, Medicare membership increased to 26,200 members, from 20,300 as on June 30, 2010 .
Moreover, Molina’s service revenue (Medicaid) jumped 75.2% year over year to $36.9 million, although investment income fell 9.6% year over year to $1.4 million.
Besides, total expenses climbed 16.1% year over year to $1.14 billion, primarily driven by general and administrative (G&A) expenses that rose 23.7% year over year to $96.9 million, depreciation and amortization (D&A) costs that escalated by 11.3% to $12.5 million and Medicaid costs that significantly surged about 175% to $39.2 million from $14.3 million in the year-ago quarter. Even premium tax expenses stood at $37.7 million against $35.0 million in the prior-year quarter.
Additionally, medical care costs increased 13.1% year over year to $949.4 million. The medical care ratio (percentage of premiums paid to cover medical claims) in the quarter declined to 84.1% from 86.0% in the year-ago quarter.
Besides, total medical care costs increased less than 3% PMPM. However, effective income tax rate in the reported quarter was slightly lower at 37.1% as against 38.1% in the second quarter of 2010.
Financial Update
Molina exited the reported quarter of 2011 with $855.1 million in cash and investments versus $751.3 million at 2010-end. As of June 30, 2011, the parent company had cash and investments of $49.6 million.
As of June 30, 2011, cash flow from operations came in at $114.9 million compared with $25.9 million in the first half of 2010. However, operating cash flow for the reported quarter declined to $30.9 million compared with $52.1 million in the year-ago quarter. At the end of the reported quarter, Molina’s total assets increased to $1.60 billion while shareholders’ equity elevated to $765.9 million.
Stock-Split Update
On April 27, 2011, the board of Molina authorized a stock spilt of 3-for-2 common shares, which were carried out in the form of issuing a stock dividend of one share for every two shares outstanding.
Accordingly, the company distributed the additional shares on May 20 to the shareholders as on May 9, 2011. The trading of Molina shares on a split-adjusted basis began on May 23, 2011.
In addition, the stock-split resulted in the increase in the number of shares of Molina’s common stock outstanding to about 45.87 million shares from 30.84 million, as reported on March 31, 2011. The fractional shares were paid in cash based on the closing market price on the record date.
Guidance
Given the higher-than-expected earnings growth in the first half of 2011, management has increased its projection for fiscal 2011 to $1.55 per share from prior $1.47 per share, post stock-split adjustment.
The hike in guidance resulted from improved performance from the already established health plans and fiscal agents coupled with higher-than-expected realization of utilization in the first half of 2011. Additionally, Molina also expects improved performance from Idaho fiscal agent contract in the second half of 2011.
However, given the budget deficit in most states of operations, primarily Texas and Florida, and the volatile rate scenario, currently, Molina’s guidance does not warrant any adjustments since this economic condition is expected to persist at least through 2012.
Our Take
Molina is well poised 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 upward guidance revision will be able to attract long-term investors.
Earlier this week, Molina’s competitor UnitedHealth Group Inc. (UNH) reported its second-quarter 2011 operating earnings of $1.16 per share, beating the Zacks Consensus Estimate of 93 cents and 99 cents recorded in the year-ago quarter. Results were aided by a strong revenue growth from UnitedHealthcare, as well as from Optum businesses.
Another peer, Coventry Health Care Inc. (CVH), is expected to announce its results before the market opens on July 29, 2011.
COVENTRY HLTHCR (CVH): Free Stock Analysis Report
MOLINA HLTHCR (MOH): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
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