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Molina Cuts Its ‘05 Profit Forecast 70%

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Times Staff Writer

A drastic cut in projected earnings by Long Beach-based Molina Healthcare Inc. has soured Wall Street’s romance with insurers serving low-income people on Medicaid. Investors hammered the company’s stock Thursday and also sold off shares in its competitors.

Molina Healthcare shares plummeted 43% after the fast-growing HMO cut its profit forecast for this year 70%, blaming rising medical costs.

Shares of other companies that handle patients through Medicaid -- a federal-state safety-net program that provides coverage for 53 million poor and disabled people, nearly half of them children -- fell as much as 16% on Thursday.

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“Is this the death knell of investor interest in Medicaid HMOs?” asked Sheryl Skolnick, an analyst at Fulcrum Global Partners in New York.

Since its formation by C. David Molina in 1980, Molina Healthcare has grown into one of the nation’s largest HMOs specializing in contracts with Medicaid, known as Medi-Cal in California. Molina’s share price has risen 163% since the company -- which serves patients through its own 21 clinics in California and other providers -- went public in 2003.

Although Molina and other Medicaid HMOs charge prices set by government contracts, limiting their ability to increase revenue, Wall Street has traditionally liked these stocks. That’s because the number of people on Medicaid is expected to increase. In five years, Molina’s membership grew from 298,000 to 788,000 last year, with major expansions in the last 18 months into new markets, such as New Mexico and Washington.

“It’s not unusual for small companies, when they expand in new markets, to have trouble estimating costs,” said Joseph France, a healthcare analyst with Banc of America Securities in New York. “But when you are small, mistakes with numbers can have a huge impact on the bottom line.”

Late Wednesday, Molina announced it was dropping its per-share net income forecast for 2005 to 73 cents to 80 cents, down from a previous forecast of $2.40 to $2.45 -- a range that the company had reaffirmed as recently as May. Net income last year was $2.04 a share.

The company also estimated that it would report a loss of 15 cents to 20 cents a share for the second quarter on Aug. 8.

The market reacted badly on Thursday, sending Molina shares down $20 to close at $26.

“We’ve been in this business for a long time, and this kind of thing is not new to us -- it’s part of the risk,” said Dr. J. Mario Molina, chief executive of Molina and son of the company’s founder. His brother John is the firm’s finance chief, and his sister also is an executive. The Molina family still owns 60% of the company.

Company executives blamed the loss on rising medical costs, including unexpected hospitalizations in New Mexico and a late flu season in March and April, which sent more people than the company anticipated to emergency rooms.

“We’ve had a lot of patients get sick in the first half of this year, but we never sacrificed on quality of care,” J. Mario Molina said.

But France and other analysts questioned whether such a severe drop in profit could be blamed on a late flu season and said the bigger problem was the company’s failure to accurately predict costs.

Thomas Carroll, an analyst at Legg Mason in Baltimore, said the earnings surprise meant that the management team would have “significant credibility problems” in the near future.

Molina said his top executives were meeting to discuss how to better control costs, possibly by opening their own clinics in New Mexico and Washington to replace those under contract with the HMO and renegotiating some hospital and doctor contracts.

The Molina news hurt shares of other managed-care companies that do business with Medicaid, after an analyst said the entire sector was overvalued.

“The Medicaid managed-care stocks trade at a 16% premium to their commercial brethren,” Credit Suisse analyst Patrick Hojlo wrote in a report Wednesday, before Molina’s numbers were released. “We question the rationale behind this premium.”

Shares of Virginia Beach, Va.-based Amerigroup Corp. fell $5.26, or 13%, to $35.52. Centene Corp. of St. Louis dropped $5.78, or 15%, to $31.60.

Hojlo called Molina’s news a “disaster,” saying the firm appeared “to have lost control of its cost trends on multiple fronts.”

Broader eligibility and a soft economy have turned Medicaid into one of the fastest-growing components for state budgets.

Given the dependence on government contracts, the business can be uncertain as contracts can be awarded to other bidders.

That’s why the outlook for Molina next year also is a concern, analysts said, noting that the company said in May that it might have lost two longtime contracts in San Bernardino and Riverside counties that have a combined value of $111 million in annual revenue.

The contracts, which expire March 31, cover nearly 100,000 Californians. A spokesman for the California Department of Health Services said the intent was to award the contract to Blue Cross of California, owned by WellPoint Inc., but Molina is appealing the decision.

“There’s been no decision yet,” said department spokesman Ken August, who added that a final award would be made in mid-August.

Molina has contracted with the state for more than 20 years and has a contract in Sacramento County for about 20,000 people, August said.

“That is a serious loss,” analyst France said. “It doesn’t bode well.”


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