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On Jan 6, 2013 we upgraded our recommendation on Molina Healthcare Inc. (MOH - Analyst Report) to Neutral given its sustained effort to enlarge its membership base that in turn would augment its premium revenue. This managed care organization currently carries a Zacks Rank #3 (Hold).

Why the Upgrade?

In Nov 2013, one of Molina’s subsidiaries – Molina Healthcare of Michigan Inc. was selected by Michigan Department of Community Health (MDCH) to participate in the Michigan Demonstration Program to Integrate Care for Persons Eligible for Medicare and Medicaid. Enrollment for this program is expected to commence on Oct 1, 2014, bolstering the overall membership base going forward.

Other health plans of Molina like those in California, Ohio and South Carolina were also selected to take part in the dual-eligible demonstration projects in 2014. Following the release of the news, analysts have raised their estimates, leading to a 0.5% increase in the full-year 2014 Zacks Consensus Estimate to $2.01 per share.

A couple of programs that are scheduled to be implemented in 2014 are also viewed favorably in terms of their contribution to membership growth. One such program that deserves special mention in this regard includes the New Mexico’s State Coverage Insurance (SCI) program with Lovelace. Membership should also increase as Molina awaits receipt of three new contracts under the Florida Statewide Medicaid Care Managed Medical Assistance Invitation to Negotiate, expected to begin in the second quarter of 2014.

Consistent improvement in the membership base should enhance the steady improvement in premiums and service revenues. The inorganic growth profile of Molina also remains impressive as the company incessantly expands its geographic reach via acquisitions. In fact, one of the acquired entities – Community Health Solutions of America Inc. is slated to transfer its Medical Homes Network membership to Molina in 2014, which should again aid membership apart from expanding company network.

However, amid the positives, rising medical care costs, declining investment income and regulations that are expected to be implemented this year such as the ban on annual and lifetime coverage caps, annual fees on health insurance companies and excise tax on high premium insurance policies raise concern over the stock. Thus, we do not expect a near-term outperformance for the stock.

Molina is scheduled to release its fourth-quarter 2013 results in the first week of Feb 2013. The Zacks Consensus Estimate for the fourth quarter of 2013 is currently pegged at 1 cent, representing a year-over-year decline of 98.2%.

Other Stocks to Consider
 
Some better-ranked stocks in the healthcare space include Addus HomeCare Corp. (ADUS - Snapshot Report), VCA Antech Inc. (WOOF - Snapshot Report) and Acadia Healthcare Company, Inc. (ACHC - Snapshot Report). While Addus carries a Zacks Rank #1 (Strong Buy), VCA Antech and Acadia carry a Zacks Rank #2 (Buy).

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