Medicaid-focused health insurer, Molina Healthcare (NYSE:MOH), is expected to debut in the S&P 500 before trading begins March 02, it was announced last Friday. The Long Beach, California-based company will replace IHS Markit Ltd (NYSE:INFORM), which is on track to complete its buyout deal with S&P Global (NYSE:SPGI) on Monday.
As shown in this 12-month stock performance graph, Molina (MOH) traded broadly with its larger peers in the Medicaid space, namely Sentinel (NYSE:CNC) and Anthem (NYSE:ANTM). which have already made their way. in the index.
However, inclusion in the S&P 500 can lead to a higher valuation of Molina (MOH) because the stocks of companies that are included in the index usually rise as their shares are added to index funds tracking the benchmark.
Despite its strong financial position, Molina's (MOH) premium valuation will also come into focus as actively managed funds are benchmarked against the new joiner's S&P 500 weight buying shares.
While Molina (MOH) posted the best topline and bottom-line growth for the recently ended quarter to post a stronger revenue beat than Sentinel (CNC) and Anthem (ANTM), its margin lagged behind peers .
Molina (MOH) recorded 88.3% of the medical care ratio (MCR) for 2021, up from 86.5% in the prior year. The measure, indicating medical costs as a percentage of premium revenue, was up 87.5% and 87.8% for the year on Anthem (ANTM) and Sentinel (CNC), respectively.
While management attributed the increase in costs to COVID-19, Molina's (MOH) financials also indicate that MCR grew to 86.9% in its relatively small market business, up from ~78.7% in the prior year. However, membership in the segment more than doubled to 728K, driven by the special enrollment period, which was introduced to address the loss of job-based coverage during COVID-19.
“We never intended to have 728,000 members; This was a function of the special enrollment period, which not only increased membership more than anyone expected, but added a significant element of adverse selection," Chief Executive Officer Joe Zubretsky noted on the earnings call.
However, to achieve the target margin for 2022, the company plans to optimize its product mix. In the new year, "we'll be pricing solely for margin, not volume," said chief financial officer, Mark Keim.
As part of the strategy, management is looking to reduce Marketplace membership to ~250K by the end of 2022, with ~320K members after the start of the year. Bronze schemes with low revenue are expected to account for only 15% in 2022, down from 41% last year.
Amid promising outlook, Molina (MOH) continues to trade at a premium to its peers that could give pause to investors who will look to capitalize on a potential rally ahead of its S&P 500 debut. Last year, COVID-19 vaccine maker Moderna (NASDAQ:MRNA) added more than 20% to the index in mid-July, up more than 20% from the day of the announcement.
Convictions on Molina (MOH) have slowly eased among analysts in recent months. While the company has retained its buy rating, the rating score has slipped to 3.69 from 3.83 a year ago, as shown in this graph.