Molina Healthcare Has More Than 40% Upside Potential, BMO Says In Upgrade

Molina Healthcare, Inc. MOH shares have gained about 9 percent in the past week, and the stock is poised to add to the gains in the wake of a bullish upgrade from BMO Capital Markets.

The Analyst

Analyst Matt Borsch upgraded Molina from Market Perform to Outperform and lifted the price target from $154 to $200, suggesting roughly 40 percent upside from current levels.

The Thesis

Molina's 2019 annual investor day gave BMO higher confidence in the sustainability of its turnaround and better visibility on a strong multiyear growth outlook, Borsch said in the Monday upgrade note. (See his track record here.) 

At the event, Molina emphasized cost efficiency as the key factor in Medicaid Managed Care, as states are in the habit of setting prices at the same level for all contracted plans.

This creates an opportunity for sustainable, strong profit margins and high returns on investment, the analyst said. 

Molina made a "compelling" case for the retention of current contracts that present the opportunity to expand with further Medicaid penetration, he said. 

"We expect near-term validation in the upcoming Texas MMC contract awards where we think Molina will maintain its six regions and potentially expand to up to seven more." 

The company said it expects $17 billion to $17.3 billion in revenue in 2020 and set a three-to-five-year annual growth target of 10-12 percent for revenue and 12-15 percent for EPS.

BMO raised its 2020 and 2021 EPS estimates from $12.30 and $13.33, respectively, to $12.50 and $15, basing the revision on its confidence in sustainability and the visibility Molina provided on its growth. 

The Price Action

Molina shares were up 3.96 percent at $147.89 at the time of publication Monday. 

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