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We have reiterated our Neutral recommendation on Molina Healthcare Inc. (MOH - Analyst Report) as the positives are dwarfed by rising medical costs, declining investment income and the negative impact of the healthcare reforms.

Why Reiterate?

Molina has been witnessing a steady increase in premiums over the past several years. Service revenues, the second largest component of the company’s revenues, have also been increasing gradually since 2010. As a result of the increasing premium and service revenues, Molina’s total revenue has also been improving steadily since 2007.

Moreover, Molina has historically increased its membership through the creation of new health plans and development of the existing ones. Moreover, membership in New Mexico is expected to increase significantly in 2013 and 2014, as Molina is one of the managed care organizations selected under the Centennial Care program of New Mexico.

However, investment income, a prime component of Molina’s revenues, has been declining since 2007. It declined 11% year over year to $1.5 million in the first quarter of 2013. As a percentage of revenues, it declined to mere 0.1% in 2012 from 1.2% in 2007. The company is also facing rising medical care costs, which are compressing margins.

Molina is expected to announce its second-quarter financial results after the closing bell on Jul 25, 2013. The Zacks Consensus Estimate for the company’s second-quarter earnings stands at 31 cents, bouncing back from a loss of 80 cents in the year-ago quarter.

Molina reported three straight quarters of positive earnings surprise. However, we cannot conclusively say that it will continue with the trend into the second quarter. This is because Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method) is -4.25% but the stock carries Zacks Rank #1 (Strong Buy) (Stocks with Zacks Ranks of #1, #2 and #3 have a significantly higher chance of beating earnings).

Other Stocks to Consider

Molina currently carries a Zacks Rank #1 (Strong Buy). Other health maintenance organizations worth considering are Heath Net Inc. (HNT - Analyst Report) – Zacks Rank #1 (Strong Buy), Humana Inc. (HUM - Analyst Report) – Zacks Rank #1 (Strong Buy) and Aetna Inc. (AET - Analyst Report) – Zacks Rank #2 (Buy).

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