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Molina Healthcare Eyes Growth Despite Escalating Expenses

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On Aug 23, we issued an updated research report on Molina Healthcare Inc. (MOH - Free Report) .

Molina Healthcare’s second-quarter 2016 bottom line beat the Zacks Consensus Estimate as well as improved year over year. Improvement in Ohio and Texas health plans, which were supported by a substantial decrease in the medical care ratio, primarily drove the upside.
 
With respect to surprise trend, this Zacks Rank #3 (Hold) health maintenance organization beat estimates in three of the last four quarters, with an average of 2.09%.

Molina Healthcare has been witnessing robust growth in two of the major components of its revenue mix – premiums and service revenues mainly due to growing membership. The momentum continued into the second quarter with revenues improving 24%.

Molina Healthcare has been growing inorganically via in-market or tuck-in acquisitions that helped the company grow significantly in existing markets. After 2015, which was deemed the most active MA (Mergers & Acquisition) year, the company completed its acquisition of Universal American’s Total Care Medicaid plan month and agreed to acquire certain Medicare Advantage assets from both Aetna Inc. and Humana Inc. (HUM - Free Report) in 2016. These deals reflect the company's focus on arranging health care services for patients with complex requirements, which in turn, is expected to boost revenues.

Molina Healthcare also possesses a healthy balance sheet with steadily improving cash flow. Though the company witnessed a decline in operating cash flow in the first quarter of 2016, the metric recovered in the following quarter and generated $139 million. A long-term trend of rising operating cash flow has been strengthening the company’s cash position and is facilitating efficient capital deployment.

However, rising medical care costs have been putting margins under pressure and hence, remain an area of concern for Molina Healthcare. The increased expenses mainly stemmed from higher utilization factors and were most evident in connection with physician and outpatient costs. High operating expenses also continue to pose a risk for the company's operating leverage and can weigh heavily on margins, bottom line and cash flows going ahead. The company’s dependence on debt financing that resulted in an increase in interest expenses is another negative.

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