Successful investing in growth stocks doesn't have to be mystifying. It boils down to finding multiple (a few dozen would be ideal) great and growing businesses operating in numerous economic sectors and investing in them all. Investors can sometimes accelerate their gains by including a few under-the-radar growth stocks in their lists.
Molina Healthcare (MOH 0.56%) isn't yet a household name among growth investors. But it is gaining a reputation for strong growth, and it's reaching a point where more and more investors are taking notice. Let's dig into Molina Healthcare's fundamentals and valuation to see whether this under-the-radar stock should make the cut.
A rapidly growing business
With the rise of chronic medical conditions, like diabetes and cancer, more individuals see a need for health insurance to help manage the ongoing cost. It's also part of why market research company Facts and Factors expects the global health insurance industry to see compound annual growth of 9.5%, from $2.1 trillion in 2021 to $3.6 trillion by 2028.
Molina Healthcare is a managed-care company focused on providing government-sponsored health insurance plans to its members. As of March 31, the health insurer had a combined membership base of 5.3 million between its Medicaid, Medicare, and Health Insurance Marketplace plans. This membership base is what supports its $17 billion market capitalization, making Molina Healthcare the seventh-biggest publicly traded health insurer in the world.
The company's trifecta of organic membership growth, occasional acquisitions, and plan premium hikes has been a winning formula. That helped push Molina Healthcare's total revenue 90% higher in the last three years to $32 billion in 2022. The company's non-GAAP (adjusted) diluted earnings per share (EPS) also soared 56.2% during that time to $17.92 in 2022.
Molina Healthcare largely continued this solid growth in the first quarter (ended March 31), except adjusted diluted EPS grew at a much faster clip than revenue. That's because companies tend to focus more on operating efficiency than top-line growth as they reach maturity.
| Metric | Q1 2022 | Q1 2023 | Growth (YOY) |
|---|---|---|---|
| Membership in medical plans | 5.1 million | 5.3 million | 3.6% |
| Revenue | $7.8 billion | $8.1 billion | 4.9% |
| EPS (GAAP) | $4.39 | $5.52 | 25.7% |
| Net margin | 3.7% | 4.1% |
Data source: Molina Healthcare Q1 2023 earnings press release. YOY=Year over year.
Molina Healthcare's revenue increased 4.9% year over year during the first quarter to $8.1 billion. Thanks to increased demand for health insurance plans, the company's membership base grew for the quarter. Along with premium hikes, this explains how revenue grew at a mid-single-digit pace in the quarter.
Molina Healthcare's GAAP-based diluted EPS surged 25.7% over the year-ago period to $5.52 during the first quarter. Because the company's operating expenses grew at a slower rate than revenue, the health insurer's net margin expanded by 40 basis points for the quarter. Coupled with a reduction in Molina Healthcare's diluted share count, adjusted diluted EPS grew several-fold more than revenue in the quarter.
Analysts anticipate the company's adjusted diluted EPS will rise by 17.8% annually through the next five years. For context, that is far above the healthcare plans industry average annual earnings growth outlook of 12.1%.
Image source: Getty Images.
Rock-solid financials
Aside from a promising industry growth forecast, Molina Healthcare has another ace up its sleeve to keep the growth coming: The company's balance sheet is an absolute fortress.
Analysts project that Molina Healthcare's net cash position will be $3.6 billion this year. Putting this into perspective, that is twice as much as the $1.8 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) the company is expected to generate in 2023. This means Molina Healthcare has tons of cash after debt obligations that it could use for acquisitions to boost its growth prospects further.
The stock is deeply undervalued
Down 11% so far in 2023, Molina Healthcare's stock has unjustifiably sold off: The underlying company's fundamentals have arguably never been better.
Molina Healthcare's forward price-to-earnings (P/E) ratio of 13 is slightly below the healthcare plans industry average forward P/E ratio of 13.4. On its face, this doesn't exactly seem like a bargain. But it's important to remember that Molina Healthcare's growth profile is well above the healthcare plans industry, so the stock deserves a premium valuation to its peers. This is what makes Molina Healthcare such a convincing buy for growth investors at the current $305 share price.
