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Molina Healthcare Sells MMS Unit to Streamline Business

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Molina Healthcare, Inc. (MOH - Free Report) has sold its unit, Molina Medicaid Solutions (MMS), to DXC Technology Company (DXC - Free Report) .

The net purchase price of $231 million received in cash from the sale will be used to invest in and focus on the company’s core health plan business. It will also beused to continue executing on its margin recovery and sustainability plan.

The stock has greatly benefited from the company’s turnaround initiatives, which have aided its margins and restored investors’ confidence.

The same is reflected in its share price, which has soared 113%, in a year’s time, outperforming the industry’s rally of 36%. The stock also zoomed ahead of the other players in the industry. To put the same into perspective, shares of other major players, namely UnitedHealth Group Inc. (UNH - Free Report) and Aetna Inc. have gained 35% and 24.7%, respectively.

Molina Healthcare’s results continued todisappoint in 2017. A decline in margins, poor shareholder returns, loss of two long-standing Medicaid contracts, dismal operational infrastructure, inefficient control over balance sheet and an indiscipline capital management were an eye sore. These induced the company to incur a net loss of $9.07 per share in 2017 compared with earnings of 92 cents in 2016.

In response to this, Molina Healthcare undertook several measures for the stock’s recovery such as significant changes made to the reprocurement process on renewal of its existing business in 2018. The company is restoring margins through operational improvements, particularly in G&A (general and administrative expenses), and enhancing the execution of managed care fundamentals.

To that end, Molina Healthcare has taken a closer look at its networks, processes utilization and care management programs in a bid to effectively manage the innate upward pressure on medical costs. The company is seeking to optimize its revenue base by concentrating on sources of value and redirecting necessary investments in achieving target margins. Finally, the company has a strong balance sheet and rigorous capital management discipline to take advantage of the attractive cash flows of its core business.

To drive its margins, Molina Healthcare has already exited certain geographic areas and business lines, such as its clinic operations and some health insurance marketplaces, which have impeded its ability to attain its target margins.

Molina Healthcare’s results for the first half of 2018 indicate that the early stages of its margin recovery and sustainability plan are working. This is because the company’s focus on managed care fundamentals and a more relentless performance management process are being reflected in its increased earnings.

The company’s Marketplace business, a pain in the recent past, has continued to outperform its forecast in 2018. The price rises made by the company along with improved retention of risk-adjusted revenues are producing promising results and projected to outpace its pretax target margin of 4.6%.

Molina Healthcare’s administrative cost ratio decreased to 7.2% in the first half of 2018 led by a combination of consistent administrative cost containment and better-than-expected revenues. Finally, Molina Healthcare has maintained its focus on optimizing capital structure and business portfolio. It has further reduced its debt, repaid the outstanding balance on a revolving line of credit and simplified its capital structure.

Molina Healthcare also revised its guidance for 2018 to the range of $7.15-$7.35 earnings per share on an increase of $3 at the midpoint of its previous expectation.

Molina Healthcare is well placed in the Medicaid industry, delivering immense scope for growth as growing retirement population and migration of higher acuity Medicaid members into the managed care setting should drive demand for its services.

Molina Healthcare carries a Zacks Rank #2 (Buy).

the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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