MOH is highly-likely a great opportunity right now
Summary:
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- ased on the author's DCF model
Founded in 1980 and headquartered in Long Beach, CA, Molina Healthcare Inc. is a multi-state managed care organization participating exclusively in government-sponsored healthcare programs such as the Medicaid program and the State Children's Health Insurance Program (SCHIP), catering to low-income persons.
The company is known for its rapid growth from 2012 to 2017, with a total of 27.4% CAGR (2012-17). It was an aggressive bidding wins of Medicaid contracts, as well as an untimely expansion into the health insurance market (via the Affordable Care Act). It was a shaky story, accompanied by reckless decisions. Which was well described in an article published a few years ago.
In 2017, MOH went through a crisis, but with the resignation of J. MOH. Mario Molina and John Molina and the appointment of Joseph Zubretsky as the new CEO, stock and profit growth resumed, as you can see in the picture below:
It is important to add that the share growth is ahead of other competitors, as well as growing in a falling market. The main resistance was 160, the price broke through in the middle of April. Before that, it approached this resistance level on the news that Sanders suspends campaign.
https://seekingalpha.com/news/3559377-health-insurers-add-to-rally-sanders-suspends-campaign
The financial report for the first quarter of 2020 was recently released. Molina Healthcare Reports First Quarter 2020 Financial Results. Premium revenue for the first quarter increased 8.9 percent year on year to $4.3 billion, while its total revenue is $4.5 billion, up from $4.1 billion in revenue it reported for the first quarter of 2019. Mostly due to the Medicaid and Medicare divisions.
However, if we look at the annual revenue figures for several years, it becomes clear that overall the company's revenue is decreasing and constitutes 1.71% CAGR for the last 3 years. This is mainly due to the fact that the company is leaving unprofitable divisions and overall it is a good sign of the ongoing restructuring.
Under the leadership of the new CEO, the company has been steadily reducing its operating expenses starting from 2017. For instance, 13.2% and 11% in 2018 and 2019, respectively. Although, total operating expenses increased 11.4% year over year to $4.2 billion due to higher medical care costs, depreciation and amortization. As a part of this initiative, the company sold its units, Pathways Health and Community Support, LLC and Molina Medicaid Solutions, which is expected to help it focus on core growth areas.
Also, the company has mixed results in Texas. The Molina unit in Texas reports that the Human Services Commission (HHSC) has notified that it will terminate all STAR+PLUS re-procurement contracts, including the solicitation from Molina Healthcare of Texas. The HHSC is currently "deliberating" the next steps in the matter.
Some sell-side analysts consider HHSC's decision to be a net positive for Molina, as there may be a significant delay in issuing a request for new proposals due to the disruption of COVID-19.
Cost or MCR in the first quarter of 2020 increased to 86.3% compared to the first quarter of 2019, which amounted to 85.3%. Let's see what caused the increase in this indicator in the picture below.
As we can see, Medicaid was stable. And in contrast, in the Medicare business, the MCR for the first quarter of 2020 was 81.7% compared to 84.7%, in the first quarter of 2019, due to rate increases and higher quality incentive revenues. And the decline of the MCR by almost 20 points in Marketplace was due to the company's price reduction in order to be more competitive.
The G&A ratio for the first quarter of 2020 increased to 7% compared to 7.3% in the first quarter of 2019, primarily due to revenue growth and positive operating leverage. Company's quarterly M&A ratio reflects approximately $6 million of additional costs associated with the mobilization of our home-based employees, along with other COVID-19-related operating protocols.
COVID-19 impacts
The recession and unimaginable reduction in U.S. hiring will have a positive impact on the company's key operating performance. According to Dean Ungar, the vice president of Moody's Investors Service:
"Molina Healthcare, Inc’s earnings in Q1 2020, were not materially impacted by the coronavirus. Its EBITDA margin of 6.6% compares favorably with its government-focused peers."
"We believe the company is well-positioned to manage the coronavirus, even if its severity and duration are worse than suggested by current trends. As a Medicaid-focused company, membership growth is likely to be driven by the economic downturn.
U.S. hospitals are losing about $50B per month due to a large number of cancellations of elective treatments, costs associated with treating COVID-19, and an increase in the number of uninsured patients. CEO of the American Hospital Association, Rick Pollack said:
"I think it's fair to say that hospitals are facing perhaps the greatest challenge that they have ever faced in their history, calling the situation a "triple whammy."
However, the net impact on U.S. health insurance companies will be the exact opposite and will be positive for them, the costs from COVID-19 will actually be very small and more than outweighed by the delayed elective procedures.
Also, it is interesting to know how strong the growth of Medicaid members is already in April. Thus, according to the company's information, the growth at the end of March and April will be probably more by 30'000 members in Medicaid compared to the same period last year. And what is most important, most likely, is that the members are truly due to the suspension of eligibility in the states. And we will only see changes in the number of Medicaid members in the second quarter of 2020.
Guidance of 2020
Over the last year of 2019, the company has confidently met its expectations set for 2019. Premium revenue was $16.2 billion. The medical care ratio was 85.8%, as the company's efforts to contain costs continued to control medical expenses while ensuring the highest quality of service to its members. The G&A ratio was 7.7% as they used a fixed cost base and began investing in growth.
According CEO Molina Healthcare Joe Zubretsky:
We improved our Medicaid and Medicare margins and earned exceptionally high margins in our Marketplace business. The 2019 total company after-tax margin of 4.4% was supported by 3.2% in Medicaid, 6.7% in Medicare and 10.3% in Marketplace. All in, this performance resulted in net income of $737 million and earnings per diluted share of $11.47. In a year when premium revenue decreased by 8% due to legacy contract losses, we were able to deliver 4.4% after-tax margins and earnings per share growth of 8%, a testament to our early-stage focus on margins. During the year, we improved an already-strong balance sheet and capital structure while the business continued to generate significant excess cash flow.
For 2020 guidance, CEO inform:
The two factors that we updated in our guidance are one that's sort of easy to understand and engage. And that is our portfolio is going to roll over into lower-yielding investments. It's irrefutable and already happening. And I think Tom pitched that as a $27 earnings per share $0.27 earnings per share headwind in our guidance. We also believe putting the accelerated membership aside that we will incur higher SG&A related to COVID-19 operational protocols, financial assistance to our employees, etc, which also we factored into our the reaffirmation of our guidance, but we did not update for anything else.
Molina has solid 2020 guidance. MOH reaffirmed its initial guidance despite the COVID-19 effect. Total revenues are expected to be $18.3 billion, suggesting an 8.7% increase from the year-ago reported number. The company anticipates earnings in the range of $11.20-$11.70 per share.
Against the background of strong positions on the balance sheet, the company directs capital to increase shareholder value. The company's Board of Directors approved a share buyback plan for up to $500 million. Cash flow from operating activities also improved significantly in 2019 due to the timing of bonuses and government payments. Molina Healthcare completed a $500 million share buy-back program. In the first quarter, the company bought back $450 million worth of shares. The company's impressive capital management position should attract investors' attention. The firm completed a $500 million share buyback program. In the first quarter of 2020, MOH bought back a total of 3.4 million shares for approximately $450 million.
MCC is purchased by Molina Healthcare Inc.
Несмотря на срыв сделки по покупке компании Next Level, топ менеджмент MOH не отчаялся и сообщил инвесторам о заключении M&A с компанией Magellan Complete Care (MCC) with a total deal value of $820 million.
Despite the breakdown of the purchase of Next Level, MOH's top management was not desperate and informed investors about the M&A with Magellan Complete Care (MCC) with a total deal value of $820 million.
https://seekingalpha.com/news/3560390-molina-nixes-nextlevel-health-partners-tie-up
The deal, which is expected to be completed in the first quarter of 2020, will serve more than 3.6 million members through publicly funded health programmes in 18 states. This is expected to enable the company to build a better service portfolio, expand its geographic reach, etc. This will enable the company to launch Medicare and the market in new Medicaid geography. The transaction is expected to increase by about 50 to 75 cents of cash income per share in the first year of ownership and at least $1.75 of cash income per share in the second year of ownership.
This is clearly positive news for the company. It will expand its Medicaid footprint and boost earnings. Also it will allow to scale enterprise-wide platforms and benefit from both operating and fixed cost leverage.
Pro-forma' projected revenue for 2020 is over $20 billion. Revenue from this transaction is expected to increase by approximately $3 billion by 2021. Molina believes that the acquisition will help achieve it's planned margin.
Let's talk about what kind of company MOH is buying and what awards it will give for the future of the company.
First of all, you need to understand that the acquired company has its own pledged growth rate. According to the press conference, the full-service Medicaid contract is at its very early stages in Arizona from about 13,000 members at the end of the year with growth forecast to 75-80,000 over the next year. Because it enjoys a preferred position in the auto assignment algorithm in the state.
Accordingly, with the geographic expansion of its presence in the new states, the company will launch a DSNP product in their marketplace product there. By purchasing one unit, MOH adds to portfolio's company three new states and three states with expired terms of validity at a purchase price of approximately 30% of the target revenue.
As of 31 December 2019, MCC served approximately 155,000 members in six states, Virginia, Arizona, Massachusetts, New York, Florida and Wisconsin. Revenue for the full year 2019 was over $2.7 billion and MOH forecast it to grow to $3 billion within two years. And, of course, just being in New York City's Westchester neighborhoods gives them plenty of opportunities to find additional opportunities in the city and perhaps to grow their business.
Management said during the Q1 conference call:
And if you can then pack on positive operating leverage, because we're not going to increase the fixed cost base of running our enterprise when we take these on, you can easily see how we got to the $0.50 to $0.75 of accretion in the first full year of ownership and at least $1.75 of cash earnings per share accretion in the second full year of ownership. So in the first year of ownership, we will most likely operate on their cost structure as integration activities take place. In year two, we will be migrating to the Molina cost structure, both our G&A platforms and the impact of payment integrity, utilization, management and risk or quality will begin to improve the medical cost ratios. And sometime in year three, we should reach the margins that we enjoy today in the moving of portfolio.
The $820 million transaction, net of certain tax benefits, is expected to close in the first quarter of 2021.
DCF model
DCF, метрика широко применяемая для нахождения недооцененных акций поможет нам понять, есть ли с фундаментальной точки зрения, перспективы роста у компании. В моих переменных, при базовом сценарии, я подсчитал:
- Рост выручки на 7.8% до конца 2020 года
- Добавил 3'000 mil. выручки к 2021 году, которая вероятно, поступит от приобретенной компании
- CAGR 2021-2024 я поставил умеренные, согласно прогнозам аналитиков, на уровне 4.4%
- Personal required rate of return - 10%
Моя модель показывает, что после вычитания из market value общий долг, добавить cash and investments and other issues then the market value of equity is around $ 9'000 million in the base scenario.
После всех расчетов, получается, что истинная цена акций с учетом метрик DCF - $214, что выше настоящей цены акции ($181.54 на момент написания статьи) на 18%.
Диапазон истинных цен на акцию, согласно моей модели составляет от $202 до $228, что соответственно составляет от 11% до 26%.
DCF, a metric widely used to find undervalued shares, will help us understand whether the company has a fundamental upside. In my variables, in the baseline scenario, I calculated:
- Revenue growth of 7.8% by the end of 2020
- Added 3'000 mil. of revenue by 2021, which is likely to come from the acquired company
- CAGR 2021-2024 I put the moderately, according to analysts' forecasts, at 4.4%.
- Personal required rate of return - 10%
My model shows that after subtracting the total debt, add cash and investments and other issues then the market value of equity is around $9'000 million in the base scenario.
After all the calculations, it turns out that the true share price including DCF metrics is $214, which is 18% higher than the current share price ($181.54 as of writing).
The range of true stock prices according to my model is from $202 to $228, which is 11% to 26% respectively.
Simply Wall St. Fair Value according to their 2 Stage Free Cash Flow to Equity is even $434, which is 202% higher than my forecast. Share price is 57% below Fair value.
Conclusion
При подведении итогов отмечу сильные и слабые стороны компании, по моему мнению.
Во первых, это сильный менеджмент. Грамотное управление финансами компании, победа в конкуренции за новые контракты для предоставления медицинских услуг Medicare и Medicaid, а также распределение чистой прибыли компании на обратный выкуп акций в 2019-2020 годах.
Во вторых, финансовая устойчивость. The availability of adequate financing on acceptable terms to fund and capitalize our expansion and growth, repay our outstanding indebtedness at maturity, and meet our general liquidity needs. И, нужно учесть, что показатель cash and cash equivalent составляет $2375 million.
В связи с большой сделкой по слиянию (M&A) открываются возможности по снижению расходов обеих компаний, а также рост выручки из за проникновения на новые рынки (Аризона, метрополия Нью Йорка) других продуктов компании.
«Страховые компании это в основном бизнесы, основанные на здоровом финансовом балансе»
Я думаю, что на рынке медицинского страхования США одно из самых важных качеств - финансовая стабильность. Это и возможность передавать часть прибыли компании ее акционерам, а также возможность покупать меньшие компании для уменьшения себестоимость своего продукта (MCR) и общих и административных издержек (SG&A), а также увеличения своего влияния в других штатах США, в которых она ещё не представлена, что также будет увеличивать выручку компании.
Как минимизировать влияние слабых сторон на компанию?
К сожалению, те расходы, связанные с реструктуризацией и повышением себестоимости в рыночном бизнесе компании и так вынужденная мера компании для увеличения рентабельности.
В целом, при желании, из можно было бы и признать за достоинства. Так как в общем это временные слабые стороны компании. Возможно, в будущем они дадут больше “benefits”, чем на них сейчас и в прошлых периодах тратила компания.
Говоря обобщённо, то рыночный бизнес Molina выглядит очень шатко. Но все это результат действий прошлого CEO и CFO, которые не отдавали себе отчета в проведении масштабного завоевания рынка в период 2012-2017 года и не обладали нужной квалификацией, чтобы управлять большой компанией.
Настоящий генеральный директор и его политика позволили компании выйти из личного кризиса 2017-2018 годов. Сейчас происходит закладывание фундамента для будущего успеха компании, что связывается с большими тратами на реструктуризацию и повышением себестоимости на рынке MarketPlace.
In summing up, I will note the strengths and weaknesses of the company, in my opinion.
First of all, it's a strong management. Competent management of the company's finances, victory in the competition for new contracts for the provision of medical services to Medicare and Medicaid, as well as the distribution of net profit for the share buyback in 2019-2020.
Second, financial stability. The availability of adequate financing on acceptable terms to fund and capitalize our expansion and growth, repay our outstanding indebtedness at maturity, and meet our general liquidity needs. And, it should be noted that the cash and cash equivalent is $2375 million.
The large M&A transaction opens up opportunities to reduce costs for both companies, as well as revenue growth due to the penetration of other products into new markets (Arizona, New York Metro).
"Insurance companies are businesses based on healthy financial balance sheet".
I think that one of the most important qualities in the U.S. health insurance market is financial stability. It is also the ability to transfer part of the company's profits to its shareholders, as well as the ability to buy smaller companies to reduce the cost of its product (MCR) and general and administrative costs (SG&A), and increase its influence in other U.S. states where it is not yet represented, which will also increase the company's revenue.
How can minimize the impact of your weaknesses on your company?
Unfortunately, those costs associated with restructuring and cost increase in the market business of the company and the already forced measure of the company to increase profitability.
In general, if you wish, you could recognize them for their merits. As in general, these are temporary weaknesses of the company. Perhaps, in the future they will give more "benefits" than the company has spent on them now and in the past periods.
Generally speaking, Molina's market business looks very shaky. But all this is the result of the actions of the past CEO and CFO, who were not aware of the large-scale market conquest in the period 2012-2017 and did not have the necessary qualifications to manage a large company.
This CEO and his policy allowed the company to overcome the personal crisis of 2017-2018. Now the foundation for the future success of the company is being laid, which is associated with the high costs of restructuring and cost increase in the MarketPlace market.