2023-03-08 11:51:44 ET
Summary
- 4Q22 earnings beat expectations, with increased FY23 EPS guidance and a Medicaid MLR guidance within the long-term target range.
- I believe MOH has multiple drivers of premium growth in FY23, including new contracts and acquisitions, despite the impact of Medicaid redeterminations.
- While there are concerns regarding HIX targets and a significant decrease in HIX membership, MOH's valuation is attractive and the company's Medicaid business is well-positioned for growth.
Thesis
Molina Healthcare ( MOH ) is focused exclusively on providing health coverage to low-income people. I admire the company's shrewd leadership, which has helped it achieve strong profit margins through careful attention to managed care basics, cost cutting, and complementary offerings. As a result of recent contract wins, I believe the company is in the best position to weather the Medicaid redetermination headwind. I am now more optimistic about MOH after its 4Q22 earnings and the latest update on Indiana. There may be cause for concern regarding the attainment of HIX targets, but I find the valuation to be quite attractive at 13x forward PE compared to the average of 18x over the company's history. I recommend buying MOH stock.
4Q22 results
With higher premium revenue and lower contract implementation costs, MOH reported a 4Q22 EPS beat and increased FY23 EPS guidance by 1%. Investors likely paid close attention to the Medicaid MLR guidance, which was 50 basis points (bps) higher than FY22. Importantly, management have stressed that the guidance accounts for COVID, the impact of redeterminations, and conservative assumptions, which set the stage for possible beat.
Medicaid
Despite the beginning of redeterminations on April 1 and pharmacy carve-outs, I see multiple drivers of premium growth in FY23. For instance, the new Iowa contract, the acquisition of Agewell, and underlying organic growth. Importantly, MOH guided for a Medicaid MCR of 88.5% for FY23, which is within the long-term target range of 88-89%. Modeling MOH has been a difficult task due to the potential impact of members with lower acuity leaving, resulting in a lower quality risk pool. Due to the lack of evidence for risk pool pressure and the fact that a small percentage of zero-utilizers have disenrolled since the pandemic began, management expects members will continue to leave at the usual rate of 3.5% (which has certainly helped investors with building models). On the other hand, I believe we could see some form of upside from the elimination of risk corridors (will be positive for EPS). That said, the decision is up to the two states that will have these corridors, and not MOH. As such, it is a wild card.
Indiana’s Managed MLTSS contract
Key news since the earnings report has been that MOH is one of four plans to begin contract negotiations for Indiana's Managed Long Term Services and Supports [MLTSS] contract. The victory only solidifies my conviction that MOH is the most prepared to deal with the Medicaid redetermination headwinds. Given the recent successes in California, Iowa, Nebraska, and now possibly Indiana, I am confident that the MOH Medicaid business will emerge net positive from redeterminations. I expect MOH to keep the award, and the contract will go into effect sometime in early 2024.
Marketplace
Based on the earnings and call, management seems to be taking a cautious approach towards investing in Marketplace and is waiting for volatility to decrease and regulatory changes to be finalized. On its pricing strategy, I expect it to result in a reduction of redetermined members enrolling in a MOH Marketplace plan, but will also lower the risk of adverse selection compared to other lower-priced plans offered by competitors. That said, I believe that MOH may have the potential to earn better margins on redetermined members than other plans, which could result in an opportunity for earnings growth in the 2H23. Another possible growth driver is if the risk pool remains stable and prices remain reasonable in 2024, MOH management plans to expand its Marketplace membership.
HIX outlook
While I appreciate HIX's implied FY23 margin improvement, its feasibility is questionable. With a 79-80% MLR in mind for FY23, the implied HIX MLR guide suggests a margin improvement of 700-800bps is necessary. I am less confident in MOH's ability to achieve target margins in 2023 given the volatility of recent performance, despite the fact that this guidance includes a reversion back to target margins given the large divergence in 2022 MLR versus initial expectations. To put this into perspective, HIX MLR would have only been around the low 80s% if we were to exclude the 2Q risk adjustment true-up, COVID effect, and the 4Q provider balance settlement. This is still well below the targeted MLR.
In addition to MLR targets, MOH also provided HIX 2023 membership guidance, which indicated a 34% decrease from the previous year. Despite management saying that the membership drop was in line with their expectations, I found it shocking that HIX has seen membership fall so dramatically for two years running. When you consider that they just finished a major rebalancing of their metal tier composition toward Silver last year, this seems like a bit of a mystery. Rates for 2023 only increased by around 9 percent due to MOH, so the increase was not excessive. It worries me that the company could possibly be keeping something from us that could have a significant impact on the company.
Conclusion
The recent 4Q22 earnings and update on Indiana have increased my optimism about the company's ability to weather the Medicaid redetermination headwind. While there may be concerns regarding the attainment of HIX targets, MOH's valuation is attractive, and the company's Medicaid business is well-positioned for growth. Overall, I recommend buying MOH.
For further details see:
Molina Healthcare: Valuation Is Cheap With Multiple Growth Levers In FY2023