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Molina Beats Estimate, Lags Y/Y

MOH UNH

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Molina Healthcare Inc. (MOH - Analyst Report) reported third-quarter 2012 net earnings per share of 7 cents, surpassing the Zacks Consensus Estimate of a loss of 13 cents. However, earnings per share lagged the year-ago earnings of 41 cents. Net income for the quarter came in at $3.4 million compared with $19 million in the prior-year quarter.

Total revenue for the reported quarter climbed to $1.54 billion from $1.18 billion in the prior-year quarter. Total revenue also exceeded the Zacks Consensus Estimate of $1.52 billion.

Premium revenues surged 31% year over year to $1.5 billion, primarily due to membership growth, favorable change in membership mix and impact of benefit expansion. Moreover, Molina’s service revenue jumped to $48.4 million from $37.7 million in the year-ago quarter and investment income increased to $1.17 million from $0.76 million a year ago. Additionally, the company recorded a rental income of $1.88 million in the quarter.

Total expenses also surged 34% year over year to $1.53 billion. The surge was driven by medical care costs that escalated to $1.31 billion from $0.96 billion in the prior-year quarter, cost of service revenue that increased to $37.0 million from $34.58 million, general and administrative (G&A) expenses that escalated to $127.5 million from $99.6 million, depreciation and amortization (D&A) costs that increased to $16.0 million from $13.4 million and premium tax expenses that inched up to $37.9 million from $36.4 million in the prior-year quarter.

However, interest expense declined to $4.32 million from $4.38 million in the year-ago quarter. Further, medical care ratio (ratio of medical care costs to premium revenue) went up to 88.3% from 84.3% in the year-ago quarter.

Operating income was $27.5 million in the reported quarter compared with $51.4 million in the comparable quarter last year.

Financial Update

Molina exited the reported quarter with $1.1 billion in cash and investments, while the parent company had cash and investments of $41 million. At the end of the quarter, Molina’s total assets increased to $1.91 billion from $1.65 billion at 2011 end, although shareholders’ equity inched down to $755.0 million from $755.1 million as of December 31, 2012. During the reported quarter, cash flow from operations declined to $28.0 million from $40.3 million in the prior-year quarter.

Peer Take

Molina’s competitor, UnitedHealth Group Inc. (UNH - Analyst Report) reported its third quarter 2012 earnings of $1.50 per share, significantly ahead of the Zacks Consensus Estimate of $1.31 per share. Higher revenue across the board, strong enrollment growth, partially offset by higher operating costs were responsible for the better-than-expected results. Also, share repurchases boosted the bottom-line earnings.

Another peer, Coventry Health Care Inc. will report its third-quarter financial results before the opening bell on October 26.

Zacks Rank

Molina currently carries a Zacks #2 Rank, implying a short-term Buy rating. Considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on the shares.

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