On Jan 30, 2013, we downgraded
Molina Healthcare Inc.
) to Neutral from Outperform based on its rising medical costs
and the negative impact of the healthcare reforms.
Why the Downgrade?
Molina is witnessing rising medical care costs, which are
compressing margins. Further, the establishment of the medical
loss ratio mandate of the healthcare reform is increasing the
costs of healthcare companies.
Further changes, which will be implemented from 2014, such as
the ban on annual and lifetime coverage caps, annual fees on
health insurance companies and excise tax on high premium
insurance policies, will likely increase the expenses of
healthcare companies such as
Coventry Health Care Inc.
Health Net, Inc.
Molina also lost a couple of important Medicaid contracts in
2012, which are expected to reduce membership base, thereby
negatively impacting revenues. The loss of the Missouri Medicaid
contract reduced this managed care company's membership by about
79,000 members. Investment income, another prime component of
Molina's revenue, has been declining since 2007, primarily due to
lower interest rates.
Moreover, the Zacks Consensus Estimate for Molina's
fourth-quarter 2012 earnings declined 4.6% to 21 cents during the
last 30 days based on 2 downward estimate revisions.
Additionally, over the last 30 days, the Zacks Consensus Estimate
for 2012 of a loss of 12 cents widened 8.3% to 13 cents. Both the
quarterly and annual results will likely decline 60% and 108%
These downward estimate revisions also had an impact on
Molina's Zacks Rank, which was downgraded to Zacks Rank #3 (Hold)
from Zacks Rank #2 (Buy).
Molina is scheduled to report its fourth quarter and full year
2012 results on Feb 7.
Other Stocks to Consider
While we remain cautious on Molina, another health maintenance
American Caresource Holdings, Inc.
), carrying a Zacks Rank #2 (Buy), is worth considering.
AMER CARESOURCE (ANCI): Free Stock Analysis
COVENTRY HLTHCR (CVH): Free Stock Analysis
HEALTH NET INC (HNT): Free Stock Analysis
MOLINA HLTHCR (MOH): Free Stock Analysis
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