Jefferies Turns Bullish On Molina, Sees Potential For Upside To Estimates

Molina Healthcare, Inc MOH recently reported third-quarter earnings that exceeded the consensus by a wide margin and raised its 2018 guidance.

The Analyst

Jefferies analyst David Windley upgraded Molina from Hold to Buy and increased the price target from $152 to $169, suggesting roughly 27-percent upside potential.

The Thesis

Molina shares have come off 14 percent from their highs on concerns about earnings sustainability, Windley said in the Tuesday upgrade note. (See his track record here.)

The analyst projects health insurance exchange, or HIX, margin pressure from health insurance exchange and reduced FL/NM revenues as risks.

The shares are still a buy even with the HIX margin reset, Windley said. The company is likely to address medical loss rebates in 2020 by reducing premiums to take share and lowering its above-peer SG&A, according to Jefferies.

"However, even with minimal action here, we believe MOH has enough incremental cost savings to drive EPS higher in 2019-20," Windley said.

The analyst sees the potential for additional cost savings in 2019-2020.

Windley estimates 5-percent upside to the consensus EPS estimates for 2019 and 12-percent upside to the 2020 consensus estimate, helped by a $3.50-plus of tailwind from cost savings and modest organic growth.

Over and above the estimates, upside could result from upside from higher HIX enrollment growth and Medicaid expansion, Windley said.

"Our confidence in above-consensus $10-plus EPS in '20, management's execution and attractive valuation are keys to our upgrade."