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Molina Sinks Despite Rev Growth

MOH UNH

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Molina Healthcare Inc. (MOH - Analyst Report) reported second-quarter 2012 net loss per share of 80 cents, which was far behind the Zacks Consensus Estimate of earnings of 4 cents as well as the year-ago earnings of 38 cents. Net loss for the quarter came in at $37.3 million compared to net income of $17.4 million in the prior-year quarter.

Total revenue for the reported quarter climbed to $1.54 billion from $1.17 billion in the second quarter of 2011. Total revenue also surpassed the Zacks Consensus Estimate of $1.50 billion.

Premium revenues surged 32% year over year to $1.49 billion, primarily due to membership growth, favorable change in membership mix and impact of benefit expansion. Moreover, Molina’s service revenue jumped to $41.7 million from $36.9 million in the year-ago quarter, although investment income decreased to $1.1 million from $1.4 million a year ago. Additionally, the company recorded a rental income of $1.3 million in the quarter.

Total expenses also climbed 40.6% year over year to $1.6 billion, primarily driven by medical care costs that escalated to $1.38 billion from $0.949 billion in the prior-year quarter, general and administrative (G&A) expenses that rose to $131 million from $97 million, depreciation and amortization (D&A) costs that increased to $16 million from $12 million and premium tax expenses that improved to $40 million from $38 million in the prior-year quarter. However, cost of service revenue declined to $31 million from $39 million in the prior-year quarter.

Additionally, interest expenses increased to $3.8 million from $3.7 million in the year-ago quarter. Further, medical care ratio (ratio of medical care costs to premium revenue) surged to 92.3% from 84.1% in the year-ago quarter.

Operating loss was $59 million in the reported quarter compared to earnings of $31 million in the comparable quarter of 2011.

Financial Update

Molina exited the reported quarter with $1.1 billion in cash and investments, while the parent company had cash and investments of $39.8 million. At the end of the quarter, Molina’s total assets increased to $1.92 billion from $1.65 billion at 2011 end, although shareholders’ equity declined to $746.0 million from $755.1 million.

During the reported quarter, cash flow from operations spiked up to $185 million from $31 million in the prior-year quarter. The huge difference is attributed to deferred revenue of $81 million in the reported quarter, compared with negative referred revenue of $25 million in the year-ago quarter.

Peer Take

Molina’s competitor, UnitedHealth Group Inc. (UNH - Analyst Report), declared its second-quarter 2012 earnings of $1.27 per share, up 9% over the year-ago quarter.

Another peer, Coventry Health Care Inc. reported second-quarter 2012 operating earnings per share of 68 cents, which surpassed the Zacks Consensus Estimate of 64 cents but was lower than the prior-year earnings of 83 cents.

Our Take

Molina’s financial result showed a sharp deterioration in the reported quarter, mainly due to higher-than-expected medical claims in Texas along with losses in Missouri and Wisconsin. Dismal performance in the new markets in Texas - Hidalgo and El Paso – also prompted the company to withdraw its 2012 earnings per share guidance in June 2012.

Operating results in the reported quarter were disappointing despite substantial revenue growth, as the improvement was offset by higher operating expenses. High operating expenses pose a risk to the company’s operating leverage. Rising medical costs are leading to margin compression.

Nevertheless, we believe that the steady increase in premium revenues and membership growth will drive earnings in future. Additionally, the company’s efficient growth strategy through acquisitions and a strong portfolio beyond managed care will likely attract long-term investors. However, the company needs to implement some cost control measures.

Molina currently carries a Zacks #3 Rank, implying a short-term Sell rating. Considering the fundamentals, we maintain a long-term Neutral recommendation on the shares.

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