Moon Capital Management Q4 2025 Letter

Company Overview - Molina Healthcare (MOH) is a managed healthcare provider serving over 5.6 million members across Medicaid, Medicare, and Marketplace programs in 21 states, with Medicaid accounting for approximately 75% of premium revenue [15][16]. - The company is currently facing a challenging margin environment, marking the second consecutive year of industry-wide losses due to post-COVID redeterminations that removed around 17 million beneficiaries from Medicaid rolls [16]. Financial Performance - Despite industry headwinds, Molina continues to generate profit, with a medical loss ratio (MLR) approximately 250 basis points better than the industry average [18]. - Management expects Medicaid to generate roughly $16 per share of earnings in 2025, with a conservative estimate of approximately $14 of EPS from Medicaid for 2026 [18]. - Each 100 basis point improvement in Medicaid MLR translates to about $4.50 in incremental EPS for the company [19]. Growth Potential - Molina's management targets 11-13% annual premium growth, largely from strategic contract wins, with embedded earnings from recently awarded contracts amounting to roughly $8.65 per share [21]. - If Medicaid rates revert toward the high end of management's long-term MLR guidance, Molina could earn approximately $37 per share in 2028, assuming a 4.5% pretax margin [23]. - The company has repurchased $1 billion of stock year-to-date, including 5.3% of shares in the most recent quarter, and has plans for additional buybacks [24]. Valuation and Market Position - Molina's five-year average multiple is approximately 15x earnings, suggesting significant upside potential; applying a 13x multiple to $40 of 2028 EPS yields a share price of roughly $520, representing approximately 225% upside from current levels [25]. - Concerns regarding the long-term role of managed care organizations in Medicaid are viewed as overstated, as approximately 75% of Medicaid beneficiaries currently receive care through HMOs [22].