Investing success hinges upon two factors: finding businesses with winning records and giving them time to work their magic. One example is Molina Healthcare (MOH -3.56%), which has beaten the S&P 500 index each year dating back to 2020. And the stock could be poised for another year of outsized performance. Let's delve into Molina Healthcare's fundamentals and valuation to find out why.
Health insurance is the place to be
There are arguably few better industries to currently operate in than health insurance. Market research firm IMARC Group anticipates that the global health insurance market will grow at a 7.1% rate from $1.7 trillion in 2022 to $2.6 trillion by 2028. The increasing prevalence of chronic health conditions and growing geriatric population should lift demand for health insurance as the years unfold.
Molina Healthcare's $17.5 billion market capitalization positions it as the seventh-biggest publicly traded health insurer in the world. As of Sept. 30, the company's membership base was just shy of 5.2 million across its Medicaid, Medicare, and Marketplace segments. Molina's year-to-date total revenue surged 16.6% higher over the year-ago period to $23.8 billion.
And thanks to a 30-plus basis point expansion in its net margin to 3.4%, non-GAAP (adjusted) diluted earnings per share (EPS) growth outpaced total revenue growth through the first three quarters of 2022. This is how Molina Healthcare's adjusted diluted EPS rocketed upward by 29.5% to $13.81.
Molina Healthcare is positioned to especially benefit from the promising health insurance industry outlook. This is because it has carved out a niche for itself as a major player in the government-sponsored health insurance industry. Enrollment in Affordable Care Act Marketplace health insurance plans reached 11.5 million as of Dec. 15, which was up 18% over the prior year.
This is why analysts are projecting that Molina Healthcare's adjusted diluted EPS will compound at 19.6% annually through the next five years. Putting this into perspective, that is far superior to the healthcare plans industry average earnings growth rate of 12.5%.
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A financially strong business
As if Molina Healthcare's tremendous growth prospects weren't enough, the company is also a financial juggernaut. The $2.9 billion net cash position that analysts expect for 2022 works out to over 16% of its market cap. And as the company generates billions in free cash flow, this net cash balance could double to $5.8 billion by 2024.
That leaves Molina Healthcare with plenty of room to execute bolt-on acquisitions to further grow its business and complete share buybacks as well.
The stock offers growth at a reasonable price
Even though it has trounced the S&P 500 index in recent years, Molina Healthcare hasn't really become an expensive stock. This is a testament to just how rapidly its underlying business has been growing.
The stock's forward price-to-earnings ratio of 15.3 is only slightly above the healthcare plans industry average of 14.9. For a company with annual earnings growth potential that is 50%-plus higher than the industry average, this is a bargain-bin valuation.
This explains why analysts have an average 12-month price target of $373 for the stock, which would represent 23% capital appreciation over the current $302 share price. That's why Molina Healthcare remains a strong buy for growth investors.
