On Friday, September 21, analysts at Susquehanna upgraded Molina Healthcare (MOH). The firm raised its rating on the stock from a Neutral Rating to a Positive rating and set a $30.00/share price target. As a result of the upgrade, shares of MOH reacted quite nicely, trading up nearly 2.80% during the first hours of trading on Friday. Today's upgrade came in the wake of a downgrade earlier in the week by Jefferies, which ended up not really affecting the flat trading session the company endured on Tuesday. What was the reasoning behind Jefferies downgrade? The analyst firm cited "the health care provider's high execution risk. Jefferies also says that given its high Medicaid focus the company is likely to demonstrate negative EPS results this year." That said I wanted to examine the company a bit further and demonstrate why I think Centene Corp. (CNC), UnitedHealth Group, Inc. (UNH) and Well Point, Inc. (WLP) are all much better options within the sector, especially when we compare the profit and operating margins of all four companies.
An Overview of Molina Healthcare
According to its website, Molina Healthcare which is based in Long Beach, California, provides Medicaid-related solutions to meet the health care needs of low-income families and individuals, as well as to assist state agencies in their administration of the Medicaid program. The company operates Medicaid managed care plans in California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin states. As of December 31, 2011, it served approximately 1.7 million members who are eligible for Medicaid, Medicare, and other government-sponsored health care programs. It provides design, development, implementation, business process outsourcing, and information technology development and administration services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, and West Virginia; and drug rebate administration services in Florida. The company offers health care services for its members through contracts with independent physicians and groups; hospitals; and ancillary providers; as well as through its 16 primary care clinics in California. It operates approximately 17 primary care community clinics in California, 2 clinics in Washington, and 3 county-owned clinics in Virginia.
Profit Margin Comparisons
In the last 12 months, MOH has demonstrated a negative profit margin of -0.62% which was outpaced by the profit margins of Centene Corp., United Health Group and Well Point, Inc. It should be noted that CNC demonstrated a profit margin of 0.72%, UNH demonstrated a profit margin of 4.97% and WLP demonstrated a profit margin of 4.09% over the same period. By examining the numbers a bit closer we see that MOH was outpaced in terms of profit margin by fairly wide margin when compared to the numbers of CNC, UNH and WLP. It should be noted that CNC outpaces MOH by a ratio of 2.16 to 1, UNH outpaces MOH by a ratio of 9.01 to 1, and WLP outpaces MOH by a ratio of 7.59 to 1.
Operating Margin Comparisons
Over the course of the last 12 months, MOH has demonstrated an operating margin of 1.05% which was outpaced by the three remaining company's I've used as comparable reference points in this article. It should be noted that CNC demonstrated an operating margin of 1.92%, UNH demonstrated an operating margin of 8.22% and WLP demonstrated an operating margin of 4.09% over the same period. By examining the numbers a bit closer we see that MOH was outpaced in terms of operating margin by fairly wide margin when compared to the numbers of CNC, UNH and WLP. It should be noted that CNC outpaces MOH by a ratio of 1.82 to 1, UNH outpaces MOH by a ratio of 7.82 to 1, and WLP outpaces MOH by a ratio of 3.89 to 1.
Molina Healthcare, in my opinion, is one the weaker companies within the healthcare sector and potential investors should proceed with caution especially when comparing the margins of these four companies. If Molina Healthcare continues to be outpaced by the competition we could easily see the stock begin to trade as low as $19.50/share. If the company can demonstrate an increase in production and over the next 12-24 months, there could be a small window for growth, but I really don't see that happening, especially since a majority of their business is focused on Medicare.