Molina Healthcare: Stock To Rise As Strategies Drive Strong Future Growth (NYSE:MOH)

Molina Healthcare (NYSE:MOH) has a number of positives going for it which can drive the stock higher. Molina is set to benefit from its key strategies to drive growth. These efforts should help to achieve Molina’s strong expected double-digit earnings growth. The stock’s attractive, low valuation and oversold condition leave plenty of upside potential for the stock.

Molina’s Business Background

Molina offers managed healthcare services to individuals and families under Medicare and Medicaid programs and through state healthcare marketplaces. As of the end of March 2024, Molina served about 5.7 million members across 21 states. Molina breaks its businesses down into four segments: Medicaid, Medicare, Marketplace, and Other.

The Medicaid segment is the majority of Molina’s business, where the company provides health plans to low-income individuals and families. Revenue from the Medicaid segment comprised 91% of MOH’s total revenue in 2023 and 79% of total revenue in Q1 2024. The Marketplace segment comprised 5.6% of Molina’s total revenue in 2023 and about 6% of Q1 2024 revenue. The Medicare segment comprised 3.4% of total 2023 revenue and 14.7% of Q1 2024 revenue. The Other segment handles long-term support services in Wisconsin, but does not produce meaningful revenue for the company.

Molina’s Growth Strategies

Molina Healthcare has key strategies to drive long-term growth. One strategy is to drive organic growth through new state procurement opportunities, by increasing market share in current areas of service while seeking additional opportunities, and by retaining existing contracts. MOH also strives to grow through mergers & acquisitions. Another strategy is to lower the medical cost ratio [MCR] to widen margins. The MCR is calculated as total medical expenses paid divided by total insurance premiums collected. Molina also reinvests excess capital into the business and/or returns it to shareholders through stock buybacks.

With these strategies, MOH can capitalize on the expected growth for Medicaid spending. The Congressional Budge Office [CBO] estimates that Medicaid spending will increase to 5% of GDP by 2035. Medicaid expenditures of $852.9 billion comprised 3.1% of total 2023 U.S. GDP of $27.36 trillion.

Molina’s Procurements

For procurements, Molina secured all seven of the company’s preferred service areas in Texas. This contract begins in September 2025 and continues for six years with the option to extend it for an additional six years. This contract increases Molina’s footprint and market share. Molina was also awarded a contract in six regions in Michigan. The regions in Michigan reduce the number of payers in many of MOH’s retained regions, which the company expects will help grow market share. Molina’s RFPs in Virginia and Florida unfortunately were not approved for contracts. However, Molina is challenging the Virginia decision.

Molina sees over $60 billion in new RFP opportunities for new potential premiums over the next three years. Near-term potential expansion opportunities exist in Kansas, Georgia, North Carolina, and Texas. Molina is confident in growing through new procurements. The company does have a good track record since implementing this growth strategy. Molina achieved 7 out of 9 for re-procurements and 8 out of 10 for new business procurements.

Molina’s Mergers & Acquisitions

Molina has M&A as part of its ongoing growth strategy. The company completed 8 acquisitions for $11 billion in revenue over the past 4 years. MOH completed its acquisition of Bright Healthcare’s California Medicare business in January 2024. This business gave Molina 109,000 additional members. In September 2023, Molina closed its acquisition of My Choice Wisconsin, which gave Molina 44,000 new members. Molina plans on continuing to seek out new potential acquisitions for ongoing add-on growth.

Molina’s Expected Growth

The 12 Wall Street analysts that cover Molina are expecting revenue to grow 16% and EPS to grow 13% in 2024. Molina’s newest procurements and acquisitions should help drive revenue to the 16% growth estimate in 2024. I view the consensus earnings estimates as reasonably attainable since Molina has strong profitability metrics to drive this growth. Molina has an ROE of 28% and an ROIC of 16%. This is higher than competitor,

Humana’s (HUM) ROE of 12% and ROIC of 9%. It is also higher than competitor, Centene’s (CNC) ROE of 10.5% and ROIC of 6.6%.

Valuation

Molina is trading at 14x expected EPS of $23.65 for 2024. Competitor, Humana is trading at 19.7x expected EPS of $16.31 for 2024. However, Centene is trading lower at 11x expected EPS of $6.85 for 2024. It is important to note that Centene is only expected to grow EPS by 2.5% in 2024 while Humana is expected to experience an earnings loss of about 38%. So, I see Molina as a good combination of having a reasonable valuation with strong expected growth. With that said, I think Molina’s stock has a good chance of outperforming Humana and Centene in 2024.

The 12 Wall Street analysts that cover Molina have a one-year price target of about $404 for Molina’s stock. This is 19% higher than the current price. This looks reasonable to me, as the price target would bring the PE to 17x expected EPS of $23.65 for 2024. That would still be below Humana’s PE of 19.7x for its expected 2024 EPS of $16.31. If Molina achieves its 13% expected earnings growth for 2024, that should be the main catalyst to drive the stock, with some PE expansion to hit the price target.

Molina’s Technical Perspective

Molina’s stock dropped since the end of March after it reached an overbought level according to the purple RSI indicator at the bottom of the chart. This could have been triggered by profit taking at the overbought level. The selling was also likely the result of a downgrade from Bank of America (BAC). Bank of America downgraded Molina to ‘Underperform’ saying that MOH and Medicaid could face rate pressure after a period of elevated margins. BoA also stated that Molina’s RFP pipeline is likely to slow. BoA also said that the 2024 Presidential election is a risk, as a shift in power could lead to less favorable policies for Medicaid & Medicare. I see these concerns as valid, but I view them more as risks to be aware of rather than definite showstoppers for Molina.

The stock dropped all the way down to an oversold level below 30 on the RSI. I see this dip as a buying opportunity.

Potential positive catalysts for Molina’s stock to rise above the oversold area could be news of new procurement approvals or the announcement of a new possible acquisition. I see the oversold condition as a good buying opportunity before the next positive catalyst comes to light.

Additional Risks for Molina

It is possible that Molina Healthcare doesn’t achieve the majority of potential re-procurements or new procurements. If Molina obtains less than the expected procurements, it would likely result in the stock’s continued decline. The company has a good track record for re-procurements and new procurements, as I mentioned earlier. If this track record began to trend down, it could put more downward pressure on the stock.

MOH depends on government contracts to be renewed. Not all of these contracts could be renewed, or some could be renewed on terms that are not as attractive as they were before. This could have a negative impact on Molina’s business.

Molina could also struggle to find lucrative acquisitions, which could limit the company’s M&A growth plans.

Molina’s Balance Sheet/Cash Flow

MOH has a solid balance sheet. Molina has $4.5 billion in total cash/equivalents and only $2.4 billion in total debt, giving the company zero net debt. Finance lease liabilities comprised $202 million of the total debt. The company has 1.4x more current assets than current liabilities for total equity of $4.5 billion. Molina has a tangible book value of $2.6 billion, or $43.49 per share.

S&P Global upgraded Molina’s credit rating to ‘BB’ up from a previous rating of ‘BB-‘. A rating of ‘BB’ is considered speculative grade or less vulnerable in the near term, but faces major ongoing uncertainties to business, financial, and economic conditions. I see the speculative rating as more to do the with uncertainties of securing favorable contracts than it is with the strength of Molina’s balance sheet.

Molina consistently produces positive cash flow. MOH had $1.7 billion in operating cash flow in 2023 and $960 million in the trailing 12 month period. For the trailing 12 month period, Molina spent $79 million on CapEx, $298 million on acquisitions, and $58 million on share repurchases. MOH was left with $495 million in levered free cash flow and $563 in unlevered free cash flow.

Molina Healthcare’s Long-Term Investment Outlook

The recent dip in the stock price could be a good buying opportunity. Molina’s valuation is at a reasonable level, leaving more room for the stock price to increase. Molina has solid strategies to continue its growth. Investors just need to be aware that the company’s success depends on favorable government decisions for new contracts and for renewals of contracts. The good news is that Molina has been getting a good stream of contracts and renewals, and the company is confident in getting them in the future. If this favorable trend continues and Molina can secure add-on acquisitions, the stock has a good chance to perform well over the long-term.