The Most Expensive Health Insurance Stock Worth Buying

Source: Molina Healthcare

Which names come to mind when you think about hot healthcare stocks? My guess is that you probably thought of a few biotechs. It might be a surprise that one of the hottest healthcare stocks over the past year is actually a health insurer: Molina Healthcare .

Molina's shares soared 74% over the last 12 months, topping many of biggest names in biotech. Those returns have inflated the stock's valuation significantly. However, Molina could still be the most expensive health insurance stock worth buying.

Premium priceHow expensive is Molina Healthcare? Here's how the company's trailing 12-month price-to-earnings multiple compares to other major health insurers with which it competes.

Source: Yahoo! Finance

Molina is well over twice as expensive as larger rivals Aetna and UnitedHealth Group . And its P/E is nearly three times as high as that of Anthem . EvenCentene is still almost 40% less than Molina based on earnings multiple.

If you looked at pretty much any other metric, Molina would lag behind. Its revenue, earnings, and market cap are significantly lower than any of these other health insurers. But relatively small Molina commands the highest valuation of them all. And for good reason.

Still a bargainRemember that Wall Street focuses much more on the future than on the past. Molina's stock deserves premium pricing because of its prospects for the future. Those prospects can be summed up in one word: Medicaid.

Thanks to the Affordable Care Act, many states have expanded their Medicaid rolls. This expansion has been music to Molina's ears. Annual revenue jumped 46% from 2013 to 2014. Earnings increased almost 18% year over year.

Molina expects the good times to keep rolling. The insurer projects 2015 revenue of $14.3 billion -- up another 48% compared to last year. Molina thinks that adjusted earnings per share for 2015 will come in at $2.35. If the company meets that target, it would reflect year-over-year earnings growth of more than 80%. The consensus analysts' earnings estimate of $2.48 per share is even more positive.

So far, only six of the 11 states in which Molina currently operates has opted to expand Medicaid. Should political winds change resulting in Medicaid expansion in any of the other five states, Molina's growth could really accelerate. Even if that doesn't happen, though, the company is poised to benefit from the trend toward increased use of managed care in controlling Medicaid costs.

Analysts predict that Molina's earnings growth will be more than double the health insurance industry average over the next five years. This growth potential actually gives Molina's stock a more compelling forward-looking valuation than all of its competitors.

RisksInvestors should always consider the risks of any stock, however. In Molina's case, the risks are easy to identify.

Probably the single biggest concern is the potential for the company to lose the Medicaid contract in one or more of the states where it operates. This happened a couple of years ago in Missouri. Molina must bid again for the Michigan Medicaid contract this year.

There's also the prospect of rapidly increasing medical costs. In particular, Molina's management has expressed worries about the sky-high prices of hepatitis C drugs. This is especially problematic for health insurers in the Medicaid market because of the relatively high incidence rate of hepatitis C in this population.

What about the legal challenge to Obamacare that the U.S. Supreme Court is currently considering -- King v. Burwell? A ruling in favor of the plaintiffs could cause Obamacare to unravel in states that don't operate their own health exchanges. That would hurt Molina, which participates in the exchanges for nine states. However, an adverse decision by the Supreme Court wouldn't be too terribly bad for the company, because its individual health insurance business is small relative to its Medicaid business.

Worth a lookYes, Molina Healthcare currently appears to be the most expensive health insurance stock around -- from a rearview mirror perspective. The company's growth opportunities, however, make this a stock that investors should consider checking out.

I suspect that more states will turn to managed care to control Medicaid costs. Molina should get its fair share of this business. The company could even be an acquisition target for larger health insurers desiring to become even bigger players in the Medicaid market. There certainly are some downside risks, but in my view Molina remains an expensive stock worth buying.

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Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Anthem and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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