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On Dec 3, 2013 we downgraded managed care organization, Molina Healthcare Inc. (MOH - Analyst Report) to Underperform, due to lack of significant growth catalyst and higher expenses that impel reduced earnings guidance.  Molina carries a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Molina’s third quarter revenues of $1.69 billion as well as EPS of 31 cents missed the Zacks Consensus Estimates of $1.71 billion and 32 cents, respectively. Full year 2013 earnings guidance (lowered to $1.15 per share from $1.55, guided earlier) was also disappointing. Meanwhile Molina expects to break even in the fourth quarter. The company also posted negative earnings surprise in the third quarter.

Molina has been incurring rising medical care costs which are adversely affecting margins. The first nine months of 2013 was also no exception. As a result operating expenses ascended, leading to a margin contraction. The reduced 2013 earnings guidance also takes into account higher costs that are expected to be incurred for the continuous infrastructure build out costs, costs to implement enhanced care coordination and medical management, and increased advertising and marketing costs.

Also, upcoming changes like a ban on annual and lifetime coverage caps, annual fees on health insurance companies and excise tax on high premium insurance policies, will likely increase expenses further. Moreover the low interest rate environment has been dragging down investment income of the company and thus Molina needs to hedge its investment portfolio from market fluctuations to prevent further decline.

Moreover, Molina is exposed to losses related to delays in enrollment and delays in implementation of programs that are expected to increase administrative costs significantly. Delay in the commencement of the revenue streams that will finance the rising G&A expense is also taken into account in the reduced guidance.

Other Stocks to Consider

Some better-ranked healthcare service providers include VCA Antech Inc. (WOOF - Snapshot Report), Addus HomeCare Corporation (ADUS - Snapshot Report) and Acadia Healthcare Company Inc. (ACHC - Snapshot Report). While Addus carries a Zacks Rank #1 (Strong Buy), VCA Antech and Acadia Healthcare carry a Zacks Rank #2 (Buy).

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