Molina Healthcare Inc. (MOH) reported third-quarter 2014 operating earnings of 79 cents per share, handily beating the Zacks Consensus Estimate of 41 cents per share. Earnings also improved from 56 cents per share earned in the year-ago quarter.
The year-over-year improvement was due to a record low in G&A expenses and expansion of Medicare Medicaid dual eligible plans in California, Illinois and Ohio.
Including depreciation and amortization of capitalized software, amortization of convertible senior notes and lease financing obligations, amortization of intangible assets, Molina Healthcare reported net income of 33 cents per share in the quarter, higher than 16 cents earned in the year-ago quarter.
Operational Update
Total revenue in the reported quarter climbed approximately 47.3% to $2.5 billion from $1.6 billion in the prior-year quarter. Revenues were a tad lower than the Zacks Consensus Estimate of $2.6 billion. The year-over-year upside in revenues was mainly driven by participation in the Medicaid programs that cover long-term services and supports (LTSS).
Premium revenues improved 46.2% year over year to $2.3 billion, driven by enrollment growth. Molina Healthcare’s service revenues also increased 2.9% to $52.6 million.
Further, Molina Healthcare’s investment income rose 17.3% year over year to $2 million. Premium tax revenues also increased 85.8% to $81.2 million in the third quarter of 2014.
Total operating expenses rose 47.1 % year over year to $2.4 billion. The rise was owing to increase in general and administrative (G&A) expenses ($178.9 million from $176.2 million), premium tax expenses ($81.2 million from $43.7 million), depreciation and amortization (D&A) costs ($24.2 million from $18.9 million) and medical care costs ($2.1 billion from $1.4 billion).
Operating income was $16.1 million in the reported quarter, comparing favorably with operating income of $7.6 million in the year-earlier quarter.
Additionally, Molina Healthcare’s interest expenses increased to approximately $14.4 million from $13.5 million in the year-ago quarter. Further, medical care ratio (ratio of medical care costs to premium revenues) deteriorated 330 basis points to 90.6% from 87.3% in the year-ago quarter.
Financial Update
As of Sep 30, 2014, cash and cash equivalents at Molina Healthcare were $1.6 billion, up from $935.9 million at 2013-end. During the third quarter of 2014, cash from operations amounted to $605.7 million as against $223.5 million used in the year-ago quarter.
As of Sep 30, 2014, total assets increased to $4.1 billion from $3 billion at 2013-end. Meanwhile, Molina Healthcare’s shareholder equity was $964.3 million as of Jun 30, 2014, against $892.9 million as of Dec 31, 2013.
2014 Outlook
Molina Healthcare expects net operating income and adjusted net income from continuing operations to decline from the previously guided range of $1.65–$2.15 per share and $4.00–$4.50 per share, respectively. This is because as per management, issues related to the recognition of ACA HIF revenues and Texas quality revenues, high medical care costs and adverse effects of some contractual provisions will have an adverse impact on 2014 earnings.
Our Take
Although Molina Healthcare’s third-quarter earnings exceeded our expectations and improved year over year, the company’s lowered outlook for full-year 2014 is a dampener. Moreover, the ACA HIF that was not reimbursed in California, New Mexico and Texas as well as the non-reimbursement of tax effects by Michigan and Utah were negatives. However, the top line surpassed the Zacks Consensus Estimate and also improved year over year.
Molina Healthcare served members in California, Illinois and Ohio under the dual eligible pilot programs, which is evident from its increase in aggregate membership. We expect the company to ride on membership growth and come up with better revenues. However, delay in recognition of HIF revenues and increasing medical care costs raise skepticism.
Performance of Other Insurers
Cigna Corp. (CI) reported third-quarter 2014 net operating earnings of $1.95 per share, comfortably beating the Zacks Consensus Estimate of $1.81.
WellPoint Inc. (WLP) posted third-quarter 2014 adjusted income of $2.36 per share, beating the Zacks Consensus Estimate of $2.28.
Health insurer Aetna Inc. (AET) reported third-quarter 2014 earnings of $1.79 per share, way ahead of the Zacks Consensus Estimate of $1.58.
Zacks Rank
Molina Healthcare currently has a Zacks Rank #3 (Hold).
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