Molina Healthcare (MOH) Up 5% Since Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Molina Healthcare Inc MOH. Shares have added about 5% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Molina Healthcare Incurs Loss in Q2, Revenues Beat

Molina Healthcare reported second-quarter 2017 net loss of $4.10 per share against the Zacks Consensus Estimate of earnings of $0.68. The bottom line also compared unfavorably with earnings of $0.58 in the year-ago quarter.

Operational Update

In the second quarter, total revenue of $5 billion beat the Zacks Consensus Estimate by 3.4%. The top line has also grew 15% year over year, primarily due to an increase in premium revenues and investment income.

For the quarter, total operating expenses rose 24% year over year to $5.3 billion. This was due to higher medical care costs, increased cost of service revenues, rise in general and administrative expenses, higher premium tax expenses as well as depreciation and amortization costs and impairment losses.

For the quarter, medical care cost increased 25% year over year to $4.5 billion due to out-of-period claims development, particularly at the Florida, Illinois, New Mexico and Puerto Rico health plans.

Continuously rising debt burden resulted in Molina Healthcare’s interest expenses increasing 8% year over year to $27 million.

Financial Update

As of Jun 30, 2017, Molina Healthcare’s cash and cash equivalents increased 6% from year-end 2016 to $3 billion.

Total assets grew 15% from the end of 2016 to $8.6 billion.

The company’s shareholder equity declined 7.8% from year-end 2016 to $1.5 billion.

Net cash used in operating activities totaled $47 million in the second quarter, down from $139 million used in the year-ago quarter.

Restructuring and Profit Improvement Plan

Due to the Molina Healthcare’s poor operating performance, it intends to implement a comprehensive restructuring and profitability improvement plan. Under the plan the company would streamline its organizational structure to improve efficiency as well as the speed and quality of decision-making.

The company would re-design core operating processes, remediate high cost provider contracts and build high quality, cost-effective networks. Molina Healthcare will also restructure its existing direct delivery operations and review its vendor base.

The company expects the Restructuring Plan to reduce annualized run-rate expenses by approximately $300 million to $400 million upon its completion in late 2018. Molina Healthcare also estimates that total pre-tax costs associated with the Restructuring Plan will be approximately $130–$150 million for the second half of 2017, with an additional $40 million to be incurred in 2018.

Molina Healthcare expects a reduction of $200 million to annualized run-rate expenses resulting from staff reductions expected to be achieved by the end of 2017 and in time for full realization in 2018.

Direct delivery operations will be restructured during the second half of 2017 and Marketplace participation will be terminated in Utah and Wisconsin in 2018.

2017 Guidance

At the end of first-quarter 2017, the company projected earnings per diluted share and adjusted earnings per diluted share to be $2.53 and $2.90, respectively for 2017.

However, at the end the second quarter, the company withdrew its 2017 earnings guidance owing to uncertain medical cost trends in the Florida, Illinois, New Mexico, and Puerto Rico health plans, uncertainty around the funding of Marketplace cost sharing subsidies and potential variability in the timing of benefits achieved and costs incurred as a result of the Restructuring Plan.

Our Take

Despite its numerous restructuring initiatives, Molina’s disappointing second-quarter results along with several headwinds faced by the company make us skeptical of its ability to return to profit any time soon. The company’s internal road blocks along with continued regulatory uncertainty in the health insurance industry will make the operating conditions difficult in days ahead.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 96.7% due to these changes.

Molina Healthcare Inc Price and Consensus

 

Molina Healthcare Inc Price and Consensus | Molina Healthcare Inc Quote

VGM Scores

At this time, Molina Healthcare's stock has an average Growth Score of C, though it is lagging a lot on the momentum front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for value and growth investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift.  Interestingly, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.

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