Take Profits In Molina Health; Stifel Downgrades To Sell

Stifel downgraded Molina Healthcare, Inc. MOH to Sell as research analysts Thomas Carroll and Mark Kelly moved their price target to $60.

Key Takeaways

Carroll and Kelly do not believe “new management can successfully expand margins in the near-to-medium-term, grow revenues from a robust reprocurement pipeline, successfully navigate an uncertain health reform landscape, and potentially sell itself given the ouster of Molina family members from executive roles.”

These factors have moved the stock up over 32 percent in recent weeks, but the analysts say the valuation doesn't factor in “the sizeable internal lift required to expand margins, the near-term rebid risks to significant revenues, and overstates the likelihood of a near-term takeout."

Earnings Will Take Time

The report noted that Molina will soon realize significant earnings power. However, the time it will take to get there and notice the earnings power is going to much longer than expected.

With revenue expected to grow, Carroll and Kelly pointed out Molina has struggled to secure new business, and its projections might be too extreme. Molina will also need to re-compete for $6.1 billion in business this year.

Other reasons for Stifel's downgrade include Molina's disproportionate risk with the potential repeal of the Affordable Care Act and management's potential desire to sell. However, even if management sold the firm, Carroll and Kelly do not see a buyer paying a premium for this business.