In 1980, Dr. David Molina formed a company to serve low-income patients in California. Today, Molina Healthcare, under the stewardship of Dr. Molina's son. Molina Healthcare has ascended to the top of the health care sector of the HB 500, and into the second position overall. Now operating in nine states, the company's revenues rose 25 percent from 2006 to 2007, to a total of $2.5 billion. Yet, like many companies in the health care sector, Molina Healthcare is facing the dilemma of lagging stock prices.
Recently, we had a chance to talk to Dr. J. Mario Molina, the company's personable CEO, about how the company is meeting that challenge and others. He also talked candidly about opportunities for new growth, the effects of presidential election, the company's search for new investors, and the advice he gives to young, Hispanic entrepreneurs. He provides an inside look into one of the HB500's most successful companies.
HB: How did the company perform in '07?
2007 was very good for us, better than we anticipated. It was an extension of 2006, which was also a good year. In fact we've had 11 consecutive quarters where we've met or exceeded Wall Street expectations.
HB: Will 2008 present new challenges?
Yes, without a doubt. We're facing a slowing economy, even in the health care sector. Specifically, California's budget problems are going to have a negative effect on us. The state plans to cut back its Medicaid Program in the second half of the year. We are characterizing those cuts as costing us about 10 cents per share. Our shares are at about $2.35 per share right now, so we anticipate it will cost us less than five percent. Overall, we estimate it will cost about $10 million in total revenue in '08. That's a small overall impact on our total revenue, which is expected to be about $2.9 billion, but it does have a greater impact on our profitability.
HB: Although the health care sector seems to be faring better than most in today's economy, is it facing its own challenges, such as the devaluation of stock?
Yes. On the whole, health care is doing well as a sector. It is seen as independent of the economy because, while people can put off buying a new car or new home, you can't put off health care. But, while investors see putting money into the health care industry as a safe move, that isn't true for the HMOs. In fact, the HMO sector has the lowest stock valuation in 10 years. Our stock has dropped 40 percent this year, and that's true in the entire HMO sector. The bigger companies say they are having a difficult time this year because costs are going up while stock prices are going down. You asked me what is the most difficult lesson I've learned in dealing with this economy, and I'd have to say it is the fact that while our company has performed very well, our stock price is not reflecting that. The lesson is that unfortunately sometimes company performance does not correlate directly to higher stock prices. We beat our earnings estimate by five cents last quarter only to see our stock price drop. It's frustrating.
HB: Is there a silver lining to the stock devaluation?
If there is, it is in the fact that we just announced we are repurchasing shares because we think they are a great buy right now. We are buying back about $30 million in shares. We have excess cash. With interest rates falling to a point where we are getting only 3.1 percent on interest income and with our stock being undervalued but growing at an historical rate of 15 percent per year, it was easy to determine that this was the most economical use of our cash.
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