Rising Healthcare Costs And Policy Risks Will Erode Margins

Key Takeaways

• Persistent rises in medical costs and tightening government policies are set to pressure profitability and weaken Molina's core business stability.
  
• Dependence on government contracts and challenges in digital innovation pose risks of membership loss and revenue decline amid increasing competition.
  
• Margin recovery and earnings growth are expected, driven by effective rate negotiations, disciplined risk management, operational efficiencies, strategic acquisitions, and successful contract wins.

Catalysts

Provides managed healthcare services to low-income families and individuals under the Medicaid and Medicare programs and through the state insurance marketplaces.

• A persistent and unprecedented acceleration in medical cost trends, particularly for behavioral health, high-cost drugs, and increasing inpatient and outpatient utilization, is likely to keep outpacing rate adjustments in Medicaid and Medicare, resulting in sustained pressure on net margins and consolidated earnings in future years.
  
• Looming federal policy risks, including the growing likelihood of further government intervention in healthcare funding, stricter eligibility requirements, and potential moves toward a single-payer system, threaten Molina's long-term revenue base by reducing or eliminating the role of private managed care organizations in core businesses.
  
• Heightened inflation and tighter state/federal healthcare budgets are expected to drive reimbursement rates even lower while simultaneously inflating medical and administrative costs, creating an environment where revenue growth stagnates and pretax margins compress well below historic levels for an extended period.
  
• Molina's continued dependence on large, government-administered contracts exposes the company to concentration risk; intensified regulatory scrutiny and competitive rebids could result in the loss of major contracts, causing sharp declines in revenue and loss of earnings stability.
  
• Limited ability to keep pace with rapid digital transformation in health care, coupled with rising consumer expectations for digital solutions and the threat from agile, technology-centric competitors, may lead to long-term attrition in membership and further erode profitability as Molina struggles to invest sufficiently in innovation and operational efficiency.

Molina Healthcare Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Molina Healthcare compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Molina Healthcare's revenue will grow by 5.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 2.7% today to 2.4% in 3 years time.
• The bearish analysts expect earnings to reach $1.2 billion (and earnings per share of $20.91) by about July 2028, up from $1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.6x on those 2028 earnings, down from 7.7x today. This future PE is lower than the current PE for the US Healthcare industry at 20.1x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.4%, as per the Simply Wall St company report.

Molina Healthcare Future Earnings Per Share Growth

Risks

• The company is showing strong advocacy efforts and proven ability to secure on-cycle and off-cycle rate adjustments in its Medicaid business, which, if successful, could bring margins back to target levels and drive margin recovery in future years.
  
• Molina's long-term guidance projects premium revenue growth to at least $52 billion in 2027, supported by recent Medicaid and Medicare duals RFP wins and a robust M&A pipeline, suggesting potential for substantial top-line expansion.
  
• States are showing flexibility and willingness to allow second-round rate filings in the Marketplace business, giving Molina the opportunity to adjust for elevated trends, acuity shifts, and risk pool changes, which could help restore target margins and earnings resilience even in volatile environments.
  
• Despite current elevated medical cost trends, management highlights operational efficiencies, a disciplined approach to keeping Marketplace exposure at just 10% of the portfolio, and G&A expense improvements, supporting the company's ability to defend and potentially enhance net margin and earnings.
  
• Molina has embedded earnings power from accretive acquisitions and contract wins, with management affirming the ultimate run-rate target; realization of one third or more of these embedded earnings in 2026 and 2027 could deliver upside to earnings growth and improve overall profitability.

Valuation

• The assumed bearish price target for Molina Healthcare is $153.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Molina Healthcare's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $330.0, and the most bearish reporting a price target of just $153.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $48.9 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 6.6x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $159.97, the bearish analyst price target of $153.0 is 4.6% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.