When you let great companies do what they do for years on end, massive capital gains are almost inevitable. Had investors put money to work in health insurer Molina Healthcare (MOH -2.86%) five years ago, they would be very happy today. The stock's 191.5% total return over that period puts the 75.6% performance of the S&P 500 index to shame.
Let's highlight three reasons why Molina could be positioned to deliver more of the same market-beating returns in the years ahead.
1. The underlying business is flourishing
Molina Healthcare got its start in 1980 with the goal of remedying disparities in access to high-quality healthcare. Since that time, the company has grown to 19 Medicare, Medicaid, and Health Insurance Marketplace health plans throughout the country for over 5 million members. This makes Molina the largest health insurer in the country to exclusively offer government-sponsored healthcare to members.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Medical membership | 5.1 million | 5.2 million |
| Net margin | 3.3% | 3.9% |
Data source: Molina Healthcare.
The company recorded $8.3 billion in total revenue for the second quarter (ended June 30), up 3.4% over the year-ago period. Due to favorable demographic trends, Molina's enrollment in health plans grew at a 1.1% clip during the quarter. Along with higher premiums for its plans, this explains the decent top-line growth in the quarter.
Molina's adjusted diluted earnings per share (EPS) climbed 24.2% over the year-ago period to $5.65 for the second quarter. Tight cost management allowed total operating expenses to grow more slowly than total revenue during the quarter.
This fueled significant adjusted net margin expansion. In addition to share repurchases, that explains how Molina Healthcare's adjusted diluted EPS growth far exceeded total revenue growth for the quarter.
The company's outlook remains exceptional. Thanks to its "trinity" of organic member growth, premium increases, and acquisitions, analysts foresee adjusted diluted EPS rising by 13.1% annually over the next five years. Put into perspective, this is more than the average annual earnings growth of 11.7% that is forecast for the healthcare-plans industry as a whole.
Image source: Getty Images.
2. A balance sheet that can support dealmaking
Acquisitions have been an important part of Molina Healthcare's growth over the years. And based on the company's financial health, it looks like this will remain true in the years ahead.
This is because analysts anticipate that Molina's net cash balance will be $2.8 billion for 2023. For a company with a market capitalization of $17.9 billion, this is a sizable cash position after factoring in liabilities.
That probably explains why management had the confidence to execute a $510 million acquisition of Medicare plan provider Bright HealthCare in June. Upon closing in the first quarter of 2024, this will expand Molina's presence in California, adding $1.8 billion in annual premium revenue and 125,000 members.
3. Molina Healthcare stock is a good deal
Shares of Molina have surged 12% higher in the past three months, yet they still look to be cheaply valued. The forward price-to-earnings (P/E) ratio of 13.4 is slightly below the healthcare-plans industry average of 13.9.
By itself, this small discount isn't anything to get excited about. But considering Molina Healthcare's above-average growth prospects, the stock should arguably be trading at a moderately higher valuation. That is probably why analysts have an average 12-month price target of $343 for the shares, which would provide 12% capital appreciation from the current $307 price.
