Molina Healthcare sacks founder’s sons; but don’t bet on a takeout

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The News:

Molina Healthcare Inc. (Long Beach CA) has fired its two top executives, sons of the medium-sized health insurer’s founder, in a surprise shakeup prompted by its poor financial performance, the company said.

@MolinaHealth has fired sons of the medium-sized health insurer’s founder Click To Tweet

In January, Molina reported a loss due to the Obamacare individual insurance program and shares dropped 17%. On Tuesday (May 2, 2017), it reported upbeat first-quarter results highlighted by net income of $1.37 per share.

CEO Dr. J. Mario Molina and CFO John Molina, who are brothers and have managed the company for decades, will be replaced by Chief Accounting Officer Joseph White, according to Reuters.

The Molina family, which started the company in 1980 and took it public, controls more than 20% of the company, through a trust and individual holdings. Large institutional investor Capitol World Investors is the next largest holder. Molina will seek a permanent CEO and White will remain as CFO, the company said.

According to the company’s proxy filing filed in March, Mario Molina is entitled to a payout worth nearly $20 million in cash and stock and John Molina is entitled to a payout worth more than $10 million. They remain on the board, says new board chairman, Dale Wolf.

“Investors are likely hoping that the management changes could lead to either future improved operational performance and/or a change in the board’s views on strategic directions,” Credit Suisse analyst Scott Fidel said in a research note.

On Wednesday (May 3, 2017), Molina shares had closed up 29% at $64.15.

Steve’s Take:

The stunning ouster of the top two executives at family-run Molina Healthcare could bring to an end the commitment the insurer has had to the individual business under the Affordable Care Act.

About 9% of all Americans enrolled in the ACA’s public marketplaces are enrolled in Molina health plans, and departing CEO Dr. J. Mario Molina was outspoken for the businessmost recently chastising Congress and the Donald Trump White House for not funding cost-sharing reductions for ACA patients.

Given new management and speculation that the company could now be a takeover target, the commitment to Molina’s Obamacare business could change, says Forbes.

Dr. C. David Molina, in 1980, and his children worked at the company at a young age “sweeping the floors, stocking shelves and filing medical records,” the company’s web site says.

Though Mario Molina is out as CEO and John Molina is out as CFO, both will remain on the board of directors. I’m just guessing their tenure won’t break any records.

Dale B. Wolf, a board director, was named non-executive Chairman of the Board on Tuesday.

In a conference call with analysts, Molina’s new board chair and new CEO said the insurer hasn’t been keeping up with its competitors. White told analysts the company is reviewing its participation on public exchanges in 2018 and would be making decisions on pricing and where it would be participating in the coming weeks.

It isn’t often you see founders of successful companies ousted. Steve Jobs comes to my mind first. The lauded co-founder of Apple left his company in 1985, amid turmoil with John Sculley, his appointed CEO. Twelve years later, Jobs regained the top position when Apple acquired his subsequent venture, Next.

But how often do you hear about an entire founding family being axed? Both Molinas given the boot are the sons of the founder David Molina and have been with the company for more two decades since their father’s death.

The uncertainty surrounding the Affordable Care Act has hurt healthcare companies in recent times, says Bezinga. Molina recently said it would drop 650,000 to 700,000 members this year if the Trump administration does not make the cost-sharing subsidy payments for Obamacare individual insurance plans, broaching the possibility of leaving the program altogether in 2018.

“In light of the Company’s disappointing financial performance, the Board has determined to change leadership in order to drive profitability through operational improvements. These changes represent targeted and deliberate actions to enhance the Company’s focus and improve its competitive position within the healthcare industry,” Wolf said, explaining the actions.

“With the industry in dynamic transition, the Board believes that now is the right time to bring in new leadership to capitalize on Molina’s strong franchise and the opportunities we see for sustained growth, Wolfe added.”

Bottom Line:

The better-than-expected quarterly results mixed with news of a C-suite massacre caused Molina shares to perk up. Earlier this year, Molina announced fourth-quarter earnings that fell well short of analysts’ expectations, largely due to issues with the exchange business, and the company offered 2017 guidance that also fell short of analysts’ projections.

It was the latest of several noisy results that left investors feeling whiplashed, said Ana Gupte, an analyst with Leerink Partners LLC. The problem was compounded by Molina’s relatively small size and margins that have been thinner than its peers’ on Medicaid business, which magnified the impact of any unexpected issues, she said.

Investors “don’t have the patience anymore,” Gupte said. Moreover, some will now see Molina as more likely to be acquired by a company eager to expand in the growing Medicaid business.

“It’s a fluid situation now, an acquirer could step in more easily,” Gupte said.

Among potential buyers are WellCare Health Plans, or Aetna, although UnitedHealth Group, Anthem and Centene could also be interested if they believe they can make it through the regulatory gauntlet.

Wall Street seems to believe that Molina’s future is looking much brighter now that the old management team is no longer calling the shots. In fact, at least one analyst thinks that bringing in a new executive team will drive margin expansion and EPS growth. If true, that could increase the company’s chances of being a takeover target.

As of April 28, 2017, the consensus forecast among 13 polled investment analysts covering Molina Healthcare advises investors to Hold their position in the company. This has been the consensus forecast since the sentiment of investment analysts deteriorated on Dec 15, 2016. The previous consensus forecast advised that Molina would Outperform the market.

 

Recommendations

1yr ago Latest
Buy 4 1
Outperform 2 1
Hold 9 9
Underperform 1 2
Sell 0 0

While all of the great things that might happen going forward could, successful C-suite management restructurings sometimes fail miserably. I saw it happen firsthand when Dick Eamer, co-founder of hospital chain National Medical Enterprises, was eased out prior to the company morphing into Tenet Healthcare.

In addition, Molina’s shares have already spiked up more than 42% over the past month, so much of the potential for good news like a takeout is already priced in.

Steve's Take: @MolinaHealth is no longer a buy, it is a solid hold Click To Tweet

A year ago, 25% of analysts gave Molina a Buy signal. That would have been a smart move. But now, for the reasons mentioned above, I agree with the majority of analysts who advise that this name is a solid Hold.

Steve Walker has no position in any stocks mentioned. MedContent Inc. has no position in any stocks mentioned. MondayMorning.com has a disclosure policy.