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Stock Rating Catalyst Category Price Target Price (9/11/2013): $36.69 Upside/(Downside): 23% Ticker: MOH Exchange: NYSE Industry: Healthcare Trading Stats ($USD millions) Market Cap: $1,680 Enterprise Value: $908 Price / Book: 2.0x PEG Ratio: 0.21x Dividend Yield: 0.0% Price / 2013E EPS: 23.2x Price / 2014E EPS: 13.9x EV / 2013E EBITDA: 3.4x EV / 2014E EBITDA: 2.6x
Price Performance 52 Week range: $21.62 - $40.90 Analyst Details IB Username: HCJK1718 Employer: Private Hedge Fund Job Title: Analyst Analyst Disclosure MOH Position Held: Yes
IB Equity Research
September 11, 2013
Company Overview
Molina Healthcare (MOH) is a Fortune 500 managed care organization focusing on providing health services to Medicaideligible 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 health care 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. Additionally, MOH operates primary care community clinics providing direct delivery of primary care constituting 17 primary care community clinics in California, two clinics in Washington, and three county-owned clinics in Fairfax County, Virginia. Medicaid sub-segments of TANF (Temporary Assistance for Needy Families), CHIP (Children's Health Insurance Program) & ABD (Aged Blind or Disabled) comprise the lions share of its 1.8M enrollees while Medicare Advantage only accounts for the remaining 2%. MOH operates licensed health plans in nine states namely California, Florida, Michigan, New Mexico, Ohio, Texas, Utah, Washington and Wisconsin with Illinois to begin in 2013. Washington and California appear to be the biggest states cumulatively accounting for nearly 42% of the total enrollment. Enrollment by Product & Geography
5%
5%
4%
2%
23%
CA UT
TX FL
OH WI
MI
Revenue Growth
In general, Medicaid health plans grow revenue by increasing their membership or generating higher rates from state governments. The latter portion is often left up to negotiations between plans and states: states often have the final say, but given cost savings managed care can generate, they are loathe to bring rates so low that plans will not want to participate. In terms of membership, growth can be achieved through two ways: by an increase in Medicaid-eligible lives within the plan's existing footprint, or by successful contract procurement, either in a new market or within an existing one. For example, MOH entered the state of TX in 2007 and in May 2010 was awarded a contract to serve Medicaid managed care patients in the seven-county Dallas service area. In September 2010, MOH won an additional contract to administer the CHIP program in 174 predominately rural counties across the state. During the 2012 state expansion, MOH added three new service delivery areas. More recently, the company has also expanded its OH footprint and effective June 01, 2013 would be expanding into 38 new counties. MOH will also be entering the state of Illinois in 2013. As a result, its membership has been growing at a CAGR of 9% from 2007-2012. MOHs major contributor, TANF and CHIP has been growing relatively slower at a CAGR of 7% (2007 -2012) while the smaller ABD and Medicare Advantage segments have witnessed rapid growth recording CAGRs of 24% and 48% respectively during the same period. As a result of this member growth, revenues have been growing rapidly as well. Not that this should accelerate in 2014, driven by the onset of Obamacare and a large California-based contract set to begin in April of next year.
IB Equity Research
September 11, 2013
14.0
Membership (000s)
Revenue (B)
12.1 12.0
10.0
MA
ABD TANF
10.8
8.0 6.0
7.1
4.8
6.0
4.0 2.0 2.5 3.1
3.7
4.1
200 0
2007 2008 2009 2010 2011 2012
0.0
2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
Margin Profile
By design, government-sponsored healthcare programs, particularly health plans, have low margins. Publically-traded Medicaid HMOs often characterize their Medicaid businesses as having pretax margins in the 3-5% range over the long-term. Except for 2009 and 2012, MOH's gross margins have been trending in the mid teen range. Sudden increases healthcare utilization levels led to lower trending gross margins in these years. Barring 2009 and 2012 MOHs operating margin has been in the 3 -4% range (Exhibit 5). A relatively high 14% YoY increase in 2009 G&A expenses was one of the primary factors behind a significant boost in operating expenses, leading to a significant drop in FY 2009 operating earnings. In 2012, the company witnessed exceptionally high utilization, especially in the newly expanded TX region, leading to lower operating margins. While this can be painful initially, as Medicaid plans have small margins to begin with, it is often quickly corrected, as states will incorporate that higher cost trend into their assumptions for future rate payments.
Margin Performance 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2007 2008 2009 2010 2011 2012
Gross Margins
EBIT Margins
Market Overview
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.
IB Equity Research
September 11, 2013
State OH IL AZ ID MI RI SC TX VA NM VT WA NY CA Total
Eligible Duals 114,000 136,000 98,235 22,548 198,644 22,737 68,000 214,402 65,415 40,000 22,000 115,000 133,880 526,902 1,777,763
Revenue Opportunity ($B) $3.4 $4.1 $2.9 $0.7 $6.0 $0.7 $2.0 $6.4 $2.0 $1.2 $0.7 $3.5 $4.0 $15.8 $53.3
Effective Date Jan-14 Jan-14 Jan-14 Jan-14 Jan-14 Jan-14 Jan-14 Jan-14 Jan-14 Jan-14 Jan-14 Jan-14 Jul-14 Apr-14
IB Equity Research
September 11, 2013
things. With little explanation for the stock's recent weakness, this catalyst should reinvigorate the stock, which is trading at a discount to its historical levels.
IB Equity Research
September 11, 2013
Financial Overview
Molina Healthcare (MOH) FY end (Dec 31) Income Statement ($M) Revenue EBITDA EBIT Pretax Net Income EPS Dil. Shares Margin and Returns (%) EBITDA EBIT Pretax Net ROIC ROA ROE Balance Sheet and Cash Flow ($M) Cash and Equivalents Total Assets Total Debt Shareholder's Equity Change in Working Capital CFFO Capex FCF Selected Operating Metrics Total Premiums ($M) Membership (K) Medical Loss Ratio SG&A Ratio 2012 $6,028.76 $99.18 $35.47 $19.07 $9.79 $0.21 46.80 2013E $6,908.14 $264.87 $182.50 $139.81 $71.50 $1.58 46.42 2014E $10,210.74 $347.81 $237.10 $184.13 $114.59 $2.65 45.20 2015E $12,100.81 $382.31 $266.74 $223.40 $145.23 $3.05 44.09 CAGR 26% 57% 96% 127% 146% 144% -2%