As one of the leading Medicaid-focused HMOs, Molina Healthcare (MOH) enjoys a strong foothold in one of the healthcare sector's fastest-growing markets. MOH should directly benefit from healthcare reform, as states like California, Michigan, and Washington expand their Medicaid rolls. In addition, there is a robust pipeline of contract opportunities transitioning state Medicaid programs from traditional government fee-for-service mechanisms to managed care. In the near term, MOH should see upside to earnings versus current expectations driven by easing medical cost trends and conservative 2013 guidance. Over the medium and longer-term, the growth story is compelling, as the company has indicated a 2015 goal of doubling its revenue base while simultaneously improving margins. Based on industry trends, MOH could grow its topline 20% or more over the next 5 years or more. In addition, as margins are still recovering from higher medical costs experienced in 2012, further normalization of cost trends could lead to significant earnings growth. Given these opportunities, the company is undervalued, trading at just under 15x consensus 2014 estimates, which could be as much as 20% too low. Next week, the company is hosting an investor day, which should present a favorable update on the company's LT growth prospects.
Molina Healthcare is a Fortune 500 managed care organization focusing on providing health services to Medicaid-eligible families and individuals. The company also assists state agencies in their administration of the Medicaid program through its subsidiary Molina Medicaid Solutions. The company focuses exclusively on government-sponsored healthcare programs and operates health plans in ten states while its Molina Medicaid Solutions segment provides design, development, implementation and business process outsourcing solutions to Medicaid agencies in an additional five states.
Medicaid is a rapidly growing segment within healthcare, which should directly benefit MOH. In addition to typical market growth of mid-single digits, there are several supplemental drivers.
Healthcare Reform (Obamacare):
Under current reform provisions starting 2014, Medicaid would expand coverage to an additional 11M uninsured. Based on its presence within key states such as CA, MI and OH, MOH could accrue another 500K members, which could lift revenue by $1.5B. Note that this could ultimately prove conservative if additional states opt into the expansion.
Outsourcing into Managed Care:
As entitlement program costs continue to rise, states are increasingly receptive to managed care solutions, which can provide immediate and long-term savings over traditional fee-for-service programs. On this state driven privatization, MOH's presence in FL, CA, TX and IL should be a top line tailwind. In addition, following the successful defense of its OH, WA and NM markets, the company faces little reprocurement risk. MOH successfully defended reprocurement of its Washington Medicaid contract in 34 counties and added one additional county effective 7/1/12. Similarly in OH, following a protest, the company was able to defend its existing Medicaid contract in the state. The company also expanded to 38 new counties effective 6/1/13. Apart from this reprocurement, MOH is also looking at expansion opportunities as many of them are in MOH's existing markets.
The Dual Eligible Opportunity:
Typically, states incur the majority of their entitlement program expenses from a small minority of the patients. Most often, this cohort is eligible for both Medicare (intended for seniors) and Medicaid (for the indigent). MOH has already won dual contracts in CA, TX, OH and IL, though the margin profile may be weak in the initial years. Under California's Coordinated Care Initiative (CCI), starting June 2013, MOH plans to enroll 50K duals in the state of CA boosting revenues by ~$900M on an annual basis. Under the CA dual demonstration project (known as California's Coordinated Care Initiative) there is mandatory managed care enrollment of the Medicaid portion of the benefit while there exists an opt-out option for the Medicare portion. The government is also integrating long-term support services (LTSS) into the contract which will include long-term nursing facility care, personal care adult day care and other support services which should help boost premiums for plans and achieve desired savings. MOH has also won the OH and IL dual integration proposals with enrollment expected to begin in Q4 2013. The company will enroll 25K duals in OH which would boost revenues by $400M while in IL MOH could add 17K duals at a PMPY of $25K boost annual revenues by ~$425M.
Overview of Catalysts:
1. Investor Day Could Provide a Positive Update to LT Growth
2. 2014 Estimates Are Too Low
3. 3Q Earnings Should Be Strong
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