On Tuesday, Molina Healthcare Inc. (MOH) reported third quarter operating earnings of 41 cents per share, which came in 2 cents ahead of the Zacks Consensus Estimate. Results were 8% higher than 38 cents reported in the year-ago quarter.
Net income soared 17.3% to $19.0 million from $16.2 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 care costs.
Quarterly Results
Total revenues in the reported quarter climbed 13.2% year over year to $1.18 billion, also exceeding the Zacks Consensus Estimate of $1.17 billion.
Molina will defer the recognition of any revenue or recoverable direct cost in Idaho till the Medicaid Management Information System in the state receives certification from the Centers for Medicare and Medicaid Services.
Premium revenues augmented 13% year over year to $1.1 billion, while it rose about 5% on per-member-per-month (PMPM) basis, aided by a membership increase (on the basis of member-month) of 8%.
Premium reduction in California led to an estimated revenue loss of $7.5 million in the reported quarter, while the minimum medical cost floor in New Mexico and profit cap in Texas led to a $5.9 million decline in revenue. However, accruals in respect of these items were reduced, leading to a $2.9 million surge in revenue.
Medicare premium revenue for the reported quarter spiked to $101.5 million from $70.7 million in the year-ago quarter, while as of September 30, 2011, Medicare membership increased to 28,200 members from 22,600 as of September 30, 2010.
Moreover, Molina’s service revenue (Medicaid) jumped 16.9% year over year to $37.7 million, although investment income sank 56.6% year over year to $0.76 million.
Besides, total expenses climbed 13.3% year over year to $1.14 billion, primarily driven by general and administrative (G&A) expenses that rose 12.3% year over year to $99.6 million and depreciation and amortization (D&A) costs that escalated by 12.3% to $13.4 million.
However, premium tax expenses declined to $36.4 million from $35.0 million in the prior-year quarter, mainly due to a shift in revenue to states with lower premium tax rates. Additionally, interest expense declined to $4.4 million from $4.6 million in the year-ago quarter.
Medical care costs increased 13.4% year over year to $959.0 million. The medical care ratio (ratio of medical care costs to premium revenue) in the quarter increased marginally to 84.3% from 84.2% in the year-ago quarter.
Besides, total medical care costs increased 5% PMPM. However, the effective income tax rate in the reported quarter was slightly lower at 35.1% as against 36.2% in the third quarter of 2010.
Financial Update
Molina exited the reported quarter with $881.0 million in cash and investments, while the parent company had cash and investments of $54.3 million.
As of September 30, 2011, year-to-date cash flow from operations came in at $155.2 million compared with $9.5 million in the first nine months of 2010. The huge difference is attributed to deferred revenue expenses of $64.3 million in 2010, while deferred revenue has been a source of income amounting to $42.6 million in 2011.
Additionally, operating cash flow for the reported quarter increased to $40.3 million compared with cash used in operations of $16.4 million in the year-ago quarter. At the end of the reported quarter, Molina’s total assets increased to $1.62 billion while shareholders’ equity elevated to $781.8 million.
Stock Update
Molina authorized a new stock repurchase program of $75 million for a combination of common stock and 3.75% convertible senior notes due 2014. The repurchase program will expire on October 25, 2012 and will be funded by the company’s credit facility and working capital.
Under the previous $7.0 million share repurchase program announced in July 2011, Molina repurchased 0.4 million shares at an average price of $17.47.
Guidance
Management affirmed the EPS projection of $1.55 per share for fiscal 2011.
Our Take
Molina is well poised with improvements across all its business lines, despite a challenging premium rate environment. Molina has impressive revenue growth and increasing scale coupled with the ability to build a strong portfolio in the industry.
However, Molina’s rising medical costs are leading to margin compression. Besides, higher operating expenses pose a risk to the company’s operating leverage. Additionally, the investment income of Molina has been declining since 2007 primarily due to lower interest rates.
We believe the efficient growth strategy through acquisitions and a strong portfolio beyond managed care will likely attract long-term investors.
On October 18, 2011, Molina’s competitor UnitedHealth Group Inc. (UNH) reported its third-quarter 2011 operating earnings of $1.17 per share, beating the Zacks Consensus Estimate of $1.12 and $1.14 recorded in the year-ago quarter. Results were aided by 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 September 28, 2011.
Molina currently carries a Zacks #3 Ranks, implying a short-term Hold rating.
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