Molina Wins New Bulls On Cost Saving, Margin Opportunities

A bullish presentation by Molina Healthcare, Inc. MOH bolstered the confidence of Street analysts Tuesday.

The Analysts

JPMorgan analyst Gary Taylor upgraded Molina from Neutral to Overweight and raised the price target from $127 to $150.

MUFG analyst Jason Twizell upgraded the stock from Neutral to Overweight and increased the price target from $135 to $142.

Reduced Risk

While medical-loss ratio — MLR — requirements from the Centers for Medicare and Medicaid inspired early bearishness, Taylor said in a Tuesday note that he no longer sees regulatory risk to Molina’s 13-percent pre-tax health insurance-exchange margins.

“MOH made the definitive statement that they expect to be above the MLR floor for 2018 and that its rolling three-year compliance requirement does not rely on the elevated levels from prior years,” the analyst said.

“The math is complex, but the primary difference relates to the MLR impact of prior-year items and the magnitude of the risk-adjustment impact on the CMS-MLR.”

Cost, Margin Opportunity

MUFG cites optimism in Molina’s opportunity to expand Medicaid margins.

“We believe MOH has the right team in place to generate sustainable Medicaid pre-tax margins that are in-line with its peers,” Twizell said in a Monday note, referencing recently raised guidance for pre-tax margins between $700 million and $800 million.

With $200 million already realized, Molina faces a $500 million to $600 million opportunity, he said.

JPMorgan is satisfied with the targets regardless of achievability.

“While we are extremely hesitant to drop nearly this level of savings to margins (would push pre-tax margins towards an unrealistic 8 percent on 2019’s expected revenue base), the target savings represent a sizable opportunity if even a portion reaches the bottom-line," Taylor said.

Revenue Potential

Geographic strength is expected to boost Molina’s three-year Medicaid revenue to $30 billion, according to MUFG.

“For MOH, Texas (CHIP, STAR, and STAR+PLUS) is the next potential material RFP catalyst, reflecting about 12 percent of annual premium revenue,” Twizell said.

By his estimate, initiatives to recontract high-cost providers and reduce unnecessary treatment, coupled with pursuit of payment software partners and pharmacy savings through CVS Health Corp CVS, should drive net income margins to the mid-3 percent range.