Molina Healthcare: It Looks Worse Than It Feels, Long-Term Prognosis Improves

Molina Healthcare, Inc. MOH shareholders were disappointed by the company’s second-quarter earnings miss that sent shares tumbling more than 8 percent Thursday morning. However, there may be a silver lining to the company’s second quarter for long-term investors.

According to Deutsche Bank analyst Chris Rigg, Molina management took a big step in the quarter in repositioning the company for a more stable performance in the future.

“More importantly, we are actually increasing our 2018 EPS estimate to $4.30 ($3.12) to take into account some softness in the core Medicaid business offset by significant improvement in the ACA business and cost savings from the headcount reductions,” Rigg wrote (see his track record here).

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Rigg says almost all the issues weighing on Molina in the second quarter as either temporary or easily remedied via pricing or design modifications.

Deutsche Bank notes five key items that led to the earnings miss:

• A $72 million impairment charge related to the Pathways buyout from 2015.
• $85 million in out-of-period medical costs in Florida, Illinois, New Mexico and Puerto Rico.
• $44 million in negative ACA risk adjustments.
• $78 million to the premium deficiency reserve, mostly to service Florida, Utah, Washington and Wisconsin.
• $43 million in restructuring costs.

Heading into 2018, Molina already plans to raise its premiums by 55 percent and cut service in its two least profitable states.

While there are still plenty of risks and unpredictability associated with Molina, Deutsche Bank believes shares are undervalued following the earnings sell-off. The firm maintains a Hold rating and $72 price target.

At last check, shares of Molina were down 8.2 percent at $60.81.