Healthcare Intelligence: Molina's Turn In The Spotlight

| About: Molina Healthcare, (MOH)

Summary

A pure play on the Medicaid Expansion Plan.

Cash rich balance sheet makes this an ideal M&A target.

Family owned and operated company since 1980.

Get your cash ready. The healthcare industry is coming to an inflection point. This year we will see the benefits of the Affordable Care Act and its real impact on Americans. We started January with another health care repeal vote, foreshadowing what we should expect going into elections.

In an industry faced with consolidations there are still opportunities left in the investment universe. Molina Healthcare (NYSE:MOH) has many of the characteristics of a buyout target. From beginners to experts, we all have an opportunity to get into a great company at a great price. This has been one insurer that has managed to stay out of the limelight and been more focused on growing organically. Although this year we can expect the company to accelerate its top-line revenue with more inorganic strategies replicating the other large insurers. Investors should be aware whether such an acquisition strategy will be used to overshadow slowing new Medicaid enrollees.

Background

Molina Healthcare, Inc. is a Fortune 500 company founded by physician David Molina in 1980. The company is currently operated by his two sons, Mario Molina - CEO and John Molina - CFO. The company generates its revenue from Medicaid, a government sponsored healthcare program for low-income and/or disabled individuals. Molina has the following states and territories covered under its program: California, Florida, Illinois, Michigan, New Mexico, Ohio, Puerto Rico, South Carolina, Texas, Utah, Washington, and Wisconsin. The company currently serves 2.6 million members.

The stock has risen over 100% since 2013, cash levels have doubled, and best of all investors are watching the intrinsic value rise. Even with so much upswing the company is selling at less than a 5x EV/EBITDA multiple. On a trading multiple the company has given the appearance to be extremely cheap due to its cash rich balance sheet. It is not everyday we see many small cap companies left as pure plays with a very attractive balance sheet. MOH is trading at a ~17x PE multiple, a slight discount to its 10-year average multiple.

Since 2010, total revenue has increased from $3.875 billion to $9.666 billion with the stock price rising threefold. It should be noted that the company's Medical Loss Ratio (NYSE:MLR) has been touching 90% recently but still been able to deliver a meaningful return on equity because of the stellar management team. Given the attractiveness of a pure play and the lofty premiums in healthcare acquisitions, investors can anticipate more upside for the rest of 2016.

Competitive Advantage

Molina is positioned to increase its strong organic growth and has been successful in integrating its past acquisitions, a key attribute from a strong management team. In hindsight, this company was an easy investment when the Affordable Care Act was signed in and has become more attractive as Medicaid continues to expand coverage across the country.

In the past few months, the shares have not had much action from recent macroeconomic and political concerns in the healthcare industry. Primary risks in this company are if organic growth begins to decline quicker than Molina can deploy alternative corporate strategies. This slowdown in growth will be associated with the declining number of Medicaid enrollees as the coverage gap begins to close. We are already seeing the larger insurers raise concerns and projecting losses from new enrollees. Humana (NYSE:HUM) announced on Friday it expects membership levels to drop and is setting aside reserves for anticipated losses.

Competitors in the Managed Care Industry consist of: UnitedHealth Group (NYSE:UNH), Aetna (NYSE:AET), Cigna (NYSE:CI), Humana , Centene (NYSE:CNC), Health Net (NYSE:HNT), WellCare Health Plans (NYSE:WCG), and Magellan Health (NASDAQ:MGLN).

Molina Healthcare's Annual Financial Data

Fiscal Year

Total Cash Equivalents

Total Assets

Total Revenues

Net Income

Equity

Current Liabilities

2010

455

1,509

4,085

54

719

565

2011

493

1,652

4,540

20

755

601

2012

795

1,934

5,914

10

782

828

2013

935

3,002

6,588

52

892

1,293

2014

1,539

4,477

9,666

62

1,010

2,174

Click to enlarge

Source: Molina's Form 10-K. All amounts in $000s.

The annual data shows that Molina has delivered exceptional financial performance over the past five years. Cash, total assets, revenue and shareholder's equity are all on the rise. This is mostly due to the implementation of the Affordable Care Act. The only area of concern is with an increasing cash position, the company will have difficulty maintaining its current return on equity if new investments do not realize a higher return. The focus for 2016 will be how managed care companies handle new enrollees and if Molina can continue to beat competitors by keeping costs low.

To become more competitive, Molina has begun offering zero copays for unlimited primary care visits for silver plan members in 2016. Molina wants patients to get the most value from their insurance premiums with lower barriers to access primary care. These plans are now being offered in Florida, Michigan, New Mexico, Ohio, Texas, Utah, and Wisconsin.

Catalysts

  • Upside: Molina can begin putting more cash to work in acquisitions or to widen its moat.

  • Upside: One of the remaining pure play growth stocks in healthcare, especially managed care.

  • Upside: Molina is a great acquisition target itself for larger insurers once regulatory hurdles are overcome this year.

  • Downside: 2016 Presidential Elections, especially from the Republican Party, can have a serious impact on future projections.

  • Downside: Poor allocation of cash can destroy shareholder's equity in the long run.

  • Downside: New Medicaid enrollees will begin declining as the coverage gaps closes going forward.

Summary

At $56 per share, the stock is becoming very attractive and we plan to initiate a long position in this company in the next 72 hours. For others interested in learning more about the company, I would suggest listening to the live broadcast on Monday, January 11, 2016 starting at 9:30 a.m. PST available on the company's website, www.molinahealthcare.com. This upcoming week we should anticipate a lot more healthcare related news to be released as executives present at the 34th Annual J.P. Morgan Healthcare Conference along with numerous other healthcare conferences taking place in San Francisco. If anyone in San Francisco would like to meet up this week to discuss the industry, I would be happy to grab coffee between events.

After these conferences, we will provide more detailed financial analysis on individual companies with insight from the executive teams themselves. Feel to free to message me if you have any questions on how the economy will affect your healthcare portfolio.

Disclosure: I am/we are long HUM, MOH.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of this commentary Vijar Kohli, his family and/or clients of Golden Door Asset Management were long Humana Inc. (HUM) and Molina Healthcare, Inc. (MOH) - although positions can change at any time. Vijar Kohli is the Portfolio Manager of Golden Door Asset Management, LLC, a registered investment advisor specializing in individual and high net worth individual private wealth management. For more information on investing with Golden Door Asset Management, LLC please visit our website, www.goldendoorasset.com. Golden Door Asset Management, LLC is a New Jersey LLC, with its principal office located in Manalapan, NJ. Vijar Kohli is also the publisher of CareStocks, a newsletter focusing in on healthcare services, medical equipment, technology and real estate stocks. More information to the newsletter can be found at www.carestocks.com. © 2015 Golden Door Asset Management, LLC. All rights reserved.