Critical Acquisitions And Medicaid Expansion Drive Profit And Membership Growth

Key Takeaways

• Molina Healthcare's strategic management of medical costs and Medicaid rate adjustments are set to enhance its Medical Care Ratio and earnings.
  
• The company's acquisition strategies and focus on Medicare and Medicaid segments aim at driving significant premium revenue growth and profitability.
  
• Relying on rate adjustments and risk corridors for Medicaid may not cover medical costs as expected, impacting earnings and margins if unforeseen costs arise.

Catalysts

Provides managed healthcare services to low-income families and individuals under the Medicaid and Medicare programs and through the state insurance marketplaces.

• Molina Healthcare's disciplined medical cost management is expected to continue improving its consolidated Medical Care Ratio (MCR), positively impacting net margins.
  
• Known Medicaid rate adjustments in the second half of 2024, due to risk corridor protection in many geographies, should improve Molina's Medicaid results and therefore boost earnings.
  
• The acquisition of ConnectiCare, which serves Marketplace and Medicare membership, is expected to provide earnings accretion of $1 per share, positively affecting future earnings.
  
• Molina's focus on growing its Medicare business, especially targeting low-income, high-acuity dual-eligible populations, could lead to improved MCR and profitability in this segment.
  
• Organic growth and new state contract wins in the Medicaid segment, bolstered by rate advocacy initiatives and recent RFP awards, are likely to drive significant premium revenue growth.

Assumptions

• Analysts are assuming Molina Healthcare's revenue will grow by 10.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 3.7% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $28.47) by about August 2027, up from $1.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.4x on those 2027 earnings, down from 18.4x today. This future PE is lower than the current PE for the US Healthcare industry at 25.5x.
• Analysts expect the number of shares outstanding to grow by 0.51% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The reliance on known and expected rate adjustments in the second half of 2024 to offset medical cost pressures in Medicaid might not sufficiently cover cost trends if adjustments are lower than anticipated, potentially impacting net margins.
  
• A significant portion of Molina's Medicaid premium revenue is protected by risk corridors, but if medical costs outpace the protections provided by these corridors more than expected, this could negatively affect earnings.
  
• Unexpected challenges or delays in integrating and improving the acquired ConnectiCare’s performance to achieve the projected $1 per share accretion could impact future earnings.
  
• If the enhanced subsidies for the Marketplace segment are not extended beyond 2025, it could lead to a loss of membership or require pricing adjustments, impacting revenue and profitability in this segment.
  
• The sustainability of mid-single-digit pretax margins in the Marketplace business relies on continued competitive pricing and risk adjustment results, which if not maintained, could negatively impact earnings growth.

Valuation

• The analysts have a consensus price target of $371.98 for Molina Healthcare based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $421.72, and the most bearish reporting a price target of just $332.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $48.5 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $334.6, the analyst's price target of $371.98 is 10.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.