Outlook Is Not Very Bright for Molina

Feb.15.10 | About: Molina Healthcare, (MOH)

Molina Healthcare, Inc. (NYSE:MOH) suffered fourth-quarter loss of 18 cents per share, which was worse than the Zacks Consensus Estimate of a loss of 16 cents. The company earned 55 cents in the year-ago quarter. The disappointing performance of the company in the quarter was attributable to increased medical care costs, higher utilization and compression of margin related to state budget shortfalls. (Click here for conference call transcript.)

Quarterly Results

Total operating revenue in the quarter came in at $964.22 million as opposed to $812.5 million in the year-ago quarter. Premium revenues in the fourth quarter of 2009 climbed approximately 19% to $962.41 million from $808.89 million in the prior-year quarter. Molina’s investment income fell 50% to $1.81 million from $3.60 million. The decline was attributable to lower interest rates.

Total expenses for the quarter climbed approximately 23.3% to $967.94 million from $785.03 million in the year-ago quarter. Medical care costs came in at $842.37 million as against $684.78 million in the year-ago quarter, up approximately 23%. The medical care ratio (the percent of premiums paid to cover medical claims) for the quarter increased to 87.5% from 84.7% in the year-ago quarter.

The increase in medical costs was attributable to the H1N1 influenza and costs associated with recently enrolled members. The impact of the epidemic is significant and has the potential to worsen in the coming quarters.

General and administrative expenses rose to $115.93 million from $91.56 million in the year-ago period. The expenses related to depreciation and amortization increased to $9.64 million from $8.69 million in the fourth quarter of 2008.

Physician and outpatient costs for the fourth quarter of 2009 increased 14% on a per-member per-month [PMPM] basis, while pharmacy costs (excluding the benefit of rebates) rose 8% PMPM and capitated costs rose 10% PMPM. However, in-patient facility costs decreased approximately 4% PMPM compared to the year-ago quarter. Pharmacy utilization increased approximately 8% compared to the year-ago quarter while unit costs in the reported quarter, excluding rebates, fell approximately 2% compared to the year-ago quarter.

Yearly Results

Molina's profit fell to $30.9 million in fiscal 2009 from $59.6 million in 2008. The company earned $1.19 per share as against $2.15 per share in 2008, down approximately 45%. The Zacks Consensus Estimate for 2009 was $1.16. Premium revenue climbed approximately 18% to $3.66 billion in 2009, resulting in total operating revenue for the year coming in at $3.67 billion as against $3.11 billion in 2008.

Total expenses for fiscal 2009 climbed approximately 20.3% to $3.61 billion from approximately $3 billion last year. Medical care costs came in at approximately $3.18 billion as against $2.62 billion in 2008, up approximately 21.4%. The medical care ratio for 2009 increased to 86.8% from 84.8% in the year ended Dec 31, 2008.

General and administrative expenses in 2009 rose to $399.15 million from $344.76 million in 2008. The expenses related to depreciation and amortization increased to $38.11 million in 2009 from $33.69 million in 2008.

During 2009, Molina purchased approximately 1.4 million shares of its common stock for $27.7 million. The company had cash and investments (excluding restricted investments) of $704.0 million, including non-current auction rate securities with a fair value of $59.7 million as of Dec 31, 2009.

2010 Outlook Backed

Molina re-affirmed its earlier earnings guidance of $1.50 per share, in line with the Zacks Consensus Estimate. The company expects revenue of approximately $3.9 billion in fiscal 2010.

Earnings Revisions Trend

The below-par showing of Molina was not a surprise since earnings estimates have been steadily going down. Over the last 30 days, 8 of the 9 analysts following the stock for the fourth quarter of 2009 have lowered earnings estimates while none have moved in the opposite direction. For fiscal 2009, 4 of the 5 analysts covering Molina have lowered earnings estimates over the last 30 days while none have moved in the opposite direction.

The outlook is not very bright for Molina. 6 of the 8 analysts following the stock for the next quarter have lowered earnings estimates over the last 30 days, while none have moved in the opposite direction.

Furthermore, estimates have been lowered by 7 of the 8 analysts (over the last 30 days) for fiscal 2010 with no upward movements. This significant downward bias justifies our short-term and long-term recommendations on the stock of Strong Sell (Zacks #5 Rank) and Underperform, respectively. Consequently, we advise investors to avoid the stock both in the short-term as well as the long-term.

Disclosure: no positions