Is Molina Healthcare Still Attractive After A 70% Run In Recent Weeks?

Molina Healthcare (NYSE:MOH), a managed care company best known for its health insurance through Medicaid and Medicare, has seen its stock outperform through the coronavirus, rising by almost 35% year-to-date, due to the impact of the Covid-19 crisis on the U.S. economy. That said, the stock could rally further as states are expecting a strong growth in Medicaid enrollments, amid high unemployment levels. A detailed comparison of Molina’s performance vis-à-vis the S&P 500, and its stock price performance compared to the 2008 crisis is available in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did Molina Healthcare Stock Fare Compared With S&P 500?

The World Health Organization (WHO) declared a global health emergency at the end of January in light of the coronavirus spread. The ongoing rally in the equity market continued till February 19 with the S&P 500 reaching a record high, but the trend reversed sharply over the following weeks. Molina stock lost 20% of its value (vs. about 34% decline in the S&P 500) between February 19 and March 23. A bulk of the decline came after March 6th, when an increasing number of coronavirus cases outside China fueled concerns of a global economic slowdown. Notably, though, the multi-billion dollar stimulus package announced by the U.S. government, and the unemployment data for recent months has helped the stock price rally roughly 70% over recent weeks (vs. 30% gain in the S&P 500) to its current level of $183.

Molina Stands To Benefit In The Current Crisis

Molina’s stock has rallied this year largely due to optimism surrounding its health insurance business. With unemployment at a very high rate of 14.7% in April (highest since the Great Depression), the Medicaid enrollments are expected to rise significantly, which will boost Molina’s business. Also, the company announced its plan to acquire Magellan’s managed care business for $850 million. This acquisition will add roughly 155,000 members, taking Molina’s base to 3.6 million members in government-sponsored healthcare programs.

We believe Molina’s Q2 results in July will confirm this reality with an increase in its total premium revenues. If signs of coronavirus containment aren’t clear by the Q2 earnings timeframe, it’s likely Molina stock is going to see a continued growth, as unemployment could rise further.

Molina Underperformed The Broader Markets Through The 2008 Downturn

Molina’s stock underperformed the broader markets through the recession of 2008-2009. Between the pre-crisis market peak of October 2007 and the approximate market bottom in March 2009, the stock was down 49%, compared to the broader S&P which was down by about 51% over the same period. This was likely due to the fact that the company continued to grow its revenues through the downturn, led by higher enrollments for Medicaid due to higher unemployment. However, the S&P 500 rallied 48% by the beginning of 2009, compared to a 22% growth for Molina’s stock over the same period. This underperformance can partly be attributed to an increase in medical costs for the company.

Will Molina Stock Continue To Grow From The Current Levels?

Molina Healthcare stock fell 20% from the market peak on February 19 to the low on March 23 compared to the 49% decline during the 2008 recession. It has already rallied upwards not only to the pre-crisis levels of $159, but a further 16% to $183, riding on the higher unemployment rate, a trend which could continue in the near term. Despite such an impressive move, Molina Healthcare stock still appears to be a good bet in our view.

The 35% move in stock price year-to-date is largely driven by P/E Multiple expansion based on 2019 earnings from 11.7x at the end of 2019 to 15.8x currently, reflecting a strong 34% growth. However, the multiple is still lower when compared to some of the other players in the industry, such as Centene’s current P/E Multiple of 20.3x, and 19.5x for Humana. These levels could potentially cause investors to re-examine the company’s valuation, and revise the P/E Multiple higher.

That said, the actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting U.S. COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. The complete set of coronavirus impact and timing analyses is available here.

Also see, Why Is Hasbro’s Stock Up 20% While Its Sales Are Down 10%?

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