IMO MDF is not out of the woods yet.
I haven't read the 10Q in detail but from the conference call and the earning release (PR), I still think MDF is still far from success though it shows some progress. (ME also mentioned that they are still in early stages/inning)
Several things that I notice that lead me to the conclusion above:
- Q1 MER (for PSN) is one of the best (don't expect it to go any higher, as ME also mentioned several times) for MDF, and not only for Q1 specific (as we know Q1 and Q4 tend to be weaker quarter) but as well for all other Qs. So don't expect them to make much more in Q2 just because it's a stronger quarter. In Q1 they make operating profit of $6.5M (before overhead) from PSN and I don't even know if they can repeat that in Q2.
- HMO loss of $3.9M in Q1 (double from last year though down from last quarter). cumulatively, the cost (and loss) for HMO for the last 2 years has been more than what have been predicted
- Marketing and advertising spending in Q1 for all MDF is only $1.6M so even if they cut all marketing and advertising to $0 in Q2 and Q3, that will translate to only $1M (2 cents) incremental net income (after tax). though I'll take it if earning for Q2 is 2 cents.
- In Q1 they have overall operating loss (even with one of the best PSN performance). They are helped by the interest income (381K) that they have from the $20M+ cash.
- DF left the company (I don't know the impact will be but we will find out in the next 2-3 quarters if we can dismiss this concern altogether)
Additionally:
- Don't expect HMO member to increase too much before the next open enrollment (those 3 special cases won't be too many, plus there will be people moving out of MDF area too)
- Don't expect the PSN member to increase as it has just decrease steadily (slowly though) for the last couple quarters (down 100 from Dec 31st, 2006)
Now on the positive side:
- MER for HMO did decrease and I hope it will stay the same or improve.
- MER for PSN at one of their best in Q1 so they don't have too much operating loss (before the interest income)
- Cash cushion/coffer of $27.9M+ (though $4.2M of them are unearned premium). I hope they keep the cash until HMO is profitable and MDF as a whole bring at least 10 cents in net income on annual basis. in teh mean time let the $1.5M in interest income each year help subsidize the HMO (as well as the PSN business subsidizing the HMO)
- Nice revenue increase in Q1
- $815/month for premium for HMO member (this gives them some room to make some profit).
Btw, if any of you have a copy of Morgan Joseph buy report from 2 years ago, you can see that they are totally way off on their prediction. They estimated 20 cents earning for 2006 and HMO enrollment of 7000-8000 members by end of 2006, and stock price $4 or maybe $5. You guys know what is the actual result was. I thought that is interesting to know and that we need to take whatever analyst said with a grain of salt and do our own DD and take our own educated guess/prediction. and It is improtant to be conservative (or at least not overly over-optimistic) and build margin of safety.
Having said all that... keep the faith long.. ! MDF still has a long way to go (but I also think they have come quite a long way too).. By next year open enrollment complete, I hope MDF HMO (before corporate overhead) to be breakeven (with 7000+ members).
Last but not least, kudos to management (ME and his team) to improve the MER of HMO even in tough competition landscape.. and continue to get the best out of their PSN business... and I'm tempted to say that they did make lemonade out of lemon.. well.. maybe they have better than lemon to begin with.. but you get my point....
JMHO,
Stanu
PS: we should be happy if they stay above $1.8 as long as there is no certainty yet that HMO will be successful.
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