In an exceptionally uncertain economic environment with concerns about a recession on the horizon, businesses in a variety of industries are reconsidering their strategies for growth. 

Rating agencies have been more cautious during this period of macroeconomic instability, especially with regard to companies that are actively pursuing growth through acquisitions. 

As we previously mentioned, rating agencies frequently view such expansion efforts with skepticism that might end up in less favorable credit ratings.

Molina Healthcare (MOH), during these challenging times, finds itself in a similar situation.

Today, we will delve into examining Molina Healthcare’s credit risk, using Uniform Accounting to determine if the concerns of rating agencies about the company’s financial standing are legitimate.

We can use Uniform Accounting to put the company’s real profitability up against its obligations and decide for ourselves the true risk of this business.

Also below, a detailed Uniform Accounting tearsheet of the company.

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Acquisitions, while a powerful tool for growth, often come with heightened risks, especially in uncertain economic times.

Macro headwinds can amplify the challenges associated with acquisitions, such as increased costs of debt and the potential for unsuccessful integration of acquired companies.

In this climate, Molina Healthcare’s (MOH) acquisition strategy stands out. It is a managed care company that primarily provides health insurance services through government programs such as Medicaid and Medicare.

While Medicaid provides long-term support and services to low-income individuals, the Medicare program serves people who are disabled or over 65. 

The company has been actively pursuing acquisitions to bolster its position in the healthcare sector.

Molina Healthcare has been intentional in its acquisition objectives, focusing on businesses that provide complementary services or broaden its geographic reach.

This calculated approach is crucial in times of economic instability because it allows for growth without overextending the company’s resources or taking on excessive risk.

Recent acquisitions by Molina Healthcare illustrate this strategy. 

In 2020, the acquisition of Magellan Complete Care for $820 million added significant value to Molina’s portfolio, bringing in 155,000 Medicaid and Medicare dual beneficiaries and enhancing the company’s presence in three additional key states. 

This acquisition, along with others, is not just about expanding the size of the company but also about enhancing the quality and reach of its services, which is crucial for sustainable growth in the healthcare industry.

In addition to acquiring companies, Molina Healthcare also buys various assets from entities.

These assets include expanded member bases, established provider networks, operational contracts and licenses, physical and technological infrastructure, experienced staff, and brand value to enhance its service offerings and market presence.

This acquisition strategy seems to be successfully implemented by the company as it has been able to increase its Uniform return on assets (“ROA”) in only four years from 8% in 2018 to 24% in 2022.

Nevertheless, despite Molina Healthcare’s significant improvement in profitability and earnings, it appears that rating agencies are primarily concerned about its aggressive acquisition strategy.

For instance, S&P gives Molina Healthcare a “BB-” rating. This rating suggests a risk of default around 11% over the next five years. It also places the company in the risky high-yield basket. 

Given its established acquisition strategy and present financial condition, we believe it deserves a significantly safer credit grade. 

We can figure out if there is a real risk for this company by leveraging the Credit Cash Flow Prime (“CCFP”) to understand how the company’s obligations match against its cash and cash flows.

In the chart below, the stacked bars represent the firm’s obligations each year for the next five years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand available at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).

The CCFP chart shows that Molina Healthcare’s cash flows are more than enough to serve all its obligations going forward.