Successful investing mostly depends on two factors. First, investors need to pick quality businesses. Second, wealth building is also more likely if these companies are in essential and growing industries. This is because the best businesses are able to capitalize the most in a thriving industry, which drives their revenue and profits higher.
Health insurance specialist Molina Healthcare (MOH 0.39%) is running a quality business in a flourishing industry (providing health insurance to individuals through government programs such as Medicaid and Medicare). Investors seem impressed as well and have run the stock price up over the past decade by 1,547%. That equates to a 31.5% compound annual growth rate. Yet as impressive as the growth this company and its stock have produced is, the company has what it takes to keep this growth going. Let's look at the reasons why.
Molina Healthcare keeps on winning
With more than 5 million customers of its Medicare and Medicaid programs and state marketplaces in 19 U.S. states, Molina Healthcare is a large-cap stock that many investors probably don't even know exists.
And yet this California-based company keeps generating results that would make any growth stock enthusiast's mouth water. The company's revenue in the second quarter surged 18.4% year over year to $8.1 billion. Its net income on a GAAP basis grew at an even better rate, up 33.7%. What factors made this robust growth possible?
Thanks to the necessity of its products, Molina Healthcare possesses pricing power. Premium hikes for customers factored into the company's revenue growth in the quarter.
Molina Healthcare's membership across its business increased 9% over the year-ago period to just over 5.1 million. A significant portion of this growth was driven by the company's acquisition of Affinity Health Plan. This health insurer served over 300,000 members at the time of Molina Healthcare's closing of the deal last October.
The other portion of Molina Healthcare's membership increase stemmed from organic growth. That's because as the cost of healthcare continues to rise and more individuals develop chronic medical conditions, they are consistently turning to health insurers to assume financial risk on their behalf.
Molina Healthcare recorded $4.55 in non-GAAP (adjusted) diluted earnings per share (EPS) for the second quarter, which was up a staggering 33.8% year over year. With its operating expenses increasing only 17.9% over the year-ago period to $7.7 billion, the company showed tremendous cost management discipline during the quarter. This is how Molina Healthcare's net margin soared 40 basis points year over year to 3.3% in the quarter.
And due to the growing demand for health insurance and the quality of Molina Healthcare, analysts are anticipating 16.7% annual adjusted diluted EPS growth through the next five years.
Molina Healthcare is a financial fortress
The company isn't just a business that is quickly growing. It also boasts an enviable balance sheet.
Molina Healthcare's current assets balance (i.e., cash and cash equivalents, investments, and receivables) is $10.3 billion, which is more than enough to comfortably cover its $7.2 billion in current liabilities and $2.2 billion in long-term debt. This means there is a low risk of the company becoming financially insolvent in the near to medium term.
A top-notch business at a relative discount
Molina Healthcare's stock is up 13.1% year to date, which is much better than the healthcare plan industry average of 2.4%. Despite this massive outperformance, the stock still has a reasonable valuation.
At first glance, the company's forward price-to-earnings ratio of 17.7 seems expensive compared with the healthcare plan industry average of 15.9. But its 16.7% annual adjusted diluted EPS growth projection for the next five years is markedly above the healthcare plan industry average of 12.7%. This arguably justifies Molina Healthcare's premium valuation, making it a compelling buy for growth investors.