let me start with this post that i posted at yahoo board right after the earning is released.. next i will say what i think about the stock price...
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Nothing surprising, but something got to give if MDF wants to be successful
As many have said (also consistent to what I said the last couple weeks), the result is not surprising, but something got to give if they want to be successful. And the time is now. This is crucial moment for MDF IMO. Either they will turn the HMO around now or they will continue to worsen. Only time will tell if they will hit the ball out of the park. The PSN (subsidizing) surely helps to give them some extra innings.
They are not out of the woods yet by far and progress around cost control definitely needs to be made ASAP. They got to figure out ways to improve HMO MER and all other costs significantly. There isn't much room for more/wider losses (more than the level that they currently incur). 102.4% HMO MER isn't too bad (if everything else is free), and it isn't the main contributor of $11.7M HMO segment loss for 2006. The other problems are all other cost (corporate overhead, marketing, admin payroll). I'm pointing this because the fact that everything else isn't free and actually these costs increases at much faster pace than operating income growth. This is going to break them unless the manage to reduce these costs (MER isn't the only culprit). Having said all that, I'm pleased to see that Mike Earley realize this (and understand the urgency of the situation) and emphasize several times that they are going to work on this. Additionally, it's interesting to see the conclusion (or hypothesis) that adding more and more counties might not be the best solution to grow profitably at the current situation.
At some point (in the next 12 months), MER for HMO will need to drop to 88-92% IMO (on a year average future run-rate), which might be hard to achieve with 5,000 members.. maybe it will be more feasible when they have 7,000 or 8,000 members... I'm not talking about breakeven level right now but just trying to see if their HMO can work out as a business..
One thing that is nice is the $23M cash, currently earning $1M+ interest (btw, if not for the $1M+ interest income on that cash, they would have posted 1 cent loss for 2006). My vote has been the same. Keep the money in the bank at least until the HMO is profitable. You will never know when you will need to tap that cash reserve. It's like a spare tire or an emergency oxygen tank if you are out in space.
I'm not too excited about external acquisition btw, but that is just my personal opinion though. If they can buy profitable members at the right price, I might consider it, otherwise, continue with the organic growth effort (external acquisition are often overrated and expensive).
All in all, not a bad 2006 in my opinion, considering everything that happened in the industry and the competititive landscape of Medicare Advantage and HMOs.
I'm still long and strong, and will read the 10-K in more detail this weekend...
Stan
PS: yahoo will start showing MDF trailing PE as 200+ :)
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