Today, Molina’s various Medicaid managed care plans have 511,000 members, 50% of whom are in California, making it larger than competitor Centene Corp. (NASDAQ: CNTE), which went public in December 2001 at $14.00 per share and now trades at $42 per share. It is smaller, however, than Amerigroup (NYSE: AGP), which went public a month before Centene and has more than doubled in value to $39 per share. Despite concerns of state Medicaid budget cutbacks, investors like the sector, and Molina surely benefited from CNTE’s and AGP’s price performance. Banc of America Securities was also the lead manager for Amerigroup.

But Molina’s rise has not been without some bumps. While net margins rose from 1.9% in 1998 to 6.0% in 2001, they fell to 4.7% last year, mostly because SG&A expense jumped by 43% to 9.5% of revenues, due in large part to a $7.8 million cash settlement related to vested stock options for two executives. In addition, the company’s medical care ratio (commonly referred to as the medical loss ratio, or MLR) has risen for three straight years, hitting 82.5% in 2002, Molina’s highest level since 1998. Few managed care companies would complain about an MLR under 83%, and this year’s first quarter was down a bit from the previous year. But as the revenue base grows, it is getting harder to post the 40% to 70% revenue increases of previous years.

The Molina brothers, one a doctor and one a lawyer (what more could you ask for in a health care company?) have succeeded their father, who founded the company, as CEO and CFO, respectively, while their sister joined the company in 2002 as an executive officer (she’s also an M.D.). The health plan subsidiaries had been operating under the name American Family Care, Inc., but the company changed its name to Molina Healthcare in March 2000, perhaps in recognition of their father.

Providing health care services to the poor is often a risky venture because someone is always going to make the accusation that you are taking financial advantage of the downtrodden. In other media there have been reports that Molina Healthcare’s performance on such things as required child immunizations has been significantly below the average for other Medicaid plans participating in California’s Medi-Cal system. Because of SEC restrictions, management cannot at this time respond to these accusations, but our guess is that the increased scrutiny public companies receive will help bring those statistics up.

With proceeds of well over $100 million from the offering, and just $8.3 million of long-term debt on the books as of March 31, 2003, Molina will certainly have the neces-sary funds to be on the prowl for some acquisitions, not to mention the availability of its publicly traded stock as well. Molina has not done a deal since the purchase of a business with 60,000 enrollees in Washington in 1999, but its competitors have been busy. Centene recently bought a 21,000-member Medicaid plan from Blue Cross and Blue Shield of Texas and Amerigroup recently completed two acquisitions, adding 220,000 members to its Medicaid business in Florida for $595 per member. Medicaid managed care plans may not be pretty, but in general they work in the 38 states that require some sort of Medicaid managed care. And that means that enrollment in the plans will probably continue to increase, something Molina is counting on for growth.

It is too early to say whether Molina will give the health care IPO market a much-needed push, primarily because most of the companies waiting in line are not service- oriented, and almost all of the postponed health care IPOs are medical device and biotechnology companies. But investors have not been burned much in this sector, at least for most IPOs since the beginning of May 2002.

Of the nine health care IPOs priced between May and December 2002, only one is trading below its offering price, and the collective average and median return is 34% and 16%, respectively. Most of those IPOs were small medical device companies, but the group also included a pharmaceutical (+167%), a managed care (+16%) and a hospice (+125%) company. The point is that investors have little reason to fear health care IPOs in general, especially those that involve a growth story or new products that are about to be launched in the market.