1 Undervalued Healthcare Stock Flying Under The Radar

Molina Healthcare is not widely known among investors but that may be about to change following 15 quarters straight of year-over-year revenue growth and a member base that has grown to approximately 5.2 million across 20 states as of the most recent quarter.

Strategic moves like acquiring My Choice Wisconsin, which added approximately 40,000 members, and securing new Medicaid contracts in New Mexico, Texas, and Iowa have been and will continue to be key to the firm’s growth. Not only have they enhanced the company’s market presence but they have also diversified its member base.

Management underscored its acquisitive strategy by taking over Brand New Day and Central Health Plan of California for approximately $510 million, a deal slated to close by the first quarter of 2024, further strengthening its market position in the Golden State.

But is all this growth from acquisition masking a problem growing organically? Or is it time to buy an excellent healthcare operator that is still largely under the radar?

Key Points

• Molina Healthcare has experienced 15 quarters of year-over-year revenue growth, and expanded its member base to 5.2 million across 20 states.
• The company’s growth is bolstered by strategic acquisitions like My Choice Wisconsin and new Medicaid contracts in multiple states.
• The company shows a 7.3% increase in revenue over the past year, with high returns on invested capital and significant upside potential according to valuation forecasts.

Why Buy Molina?

Molina Healthcare’s revenues (comprised of premium revenue, premium tax revenue, and investment income among other sources) rose by another 7.3% over the past twelve months.

Primarily, the top line depends on state and federal healthcare programs like Medicaid and Medicare that provide a stable and predictable revenue stream.

The leadership team has not just done a good job growing the top line, but also converting that into profitability. On key financial metrics, the company is batting a high average. For example, the return on invested capital is 19.7% and free cash flow yield is 9.7%, both of which are impressive.

For value investors, it’s invigorating to see the stock has 31.4% upside potential to fair value according to a discounted cash flow forecast analysis, but there are some lingering concerns.

What Bears Are Watching

A primary concern for shareholders is Molina’s dependence on government contracts, where even small changes in legislation can detrimentally impact financial statements.

The firm’s leadership also face challenges from competitive bidding and contract renewals, especially in states with open bidding processes. So too the rising cost of medical services risk straining operating margins.

A final notable concern stems from operational hurdles, particularly those relating to the integration of acquisitions like My Choice Wisconsin, where the potential failure to achieve synergies could negatively affect profitability.

Is Molina Stock a Buy?

Despite the risks posed, Molina Healthcare stands out as an operationally efficient firm with growing revenues that remains undervalued, even after its share price has gone a run this year, up 13.75% for the year.

Its free cash flow yield just shy of 10% and sky high ROIC are evidence of a competitive advantage that is likely to endure for the foreseeable future.