We continue to have an Underperform rating on Molina Healthcare, Inc. (MOH) with a price target of $18. 

On Feb 11, 2010 Molina reported disappointing results for the fourth quarter of 2009 as well as fiscal 2009. In the fourth quarter the company suffered a loss of 18 cents per share as against earnings of 55 cents in the year-ago period. The disappointing performance of the company in the quarter was attributable to increased medical care costs, higher utilization and compression of margin related to state budget shortfalls.
 
The company earned $1.19 per share in 2009 as against $2.15 per share in 2008, down approximately 45%. Molina’s profit fell to $30.9 million in fiscal 2009 from $59.6 million in 2008. The decline in profit was attributable to higher operating expenses. 

Total expenses for fiscal 2009 climbed approximately 20.3% to $3.61 billion from approximately $3 billion last year. The increase in medical costs (the primary component of operating expenses) was attributable to the H1N1 influenza and costs associated with recently enrolled members. Annual medical care costs came in at approximately $3.18 billion as against $2.62 billion in 2008, up approximately 21.4%. Furthermore, we are also concerned about the intense competition that Molina is exposed to.
 
Molina, headquartered in Long Beach, California was established by C. David Molina in 1980 as a healthcare service provider to Medicaid patients (low-income families and individuals) in California. Molina Healthcare’s licensed health plan subsidiaries in California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, and Washington currently serve approximately 1.45 million members. The company was formerly known as American Family Care, Inc. until it changed its name to Molina Healthcare, Inc. in March 2000. 

Earnings Revisions
 
Trend The below-par showing of Molina was not a surprise since earnings estimates have been steadily going down. In terms of earnings surprises, the company has delivered negative surprises over the last 3 quarters.
 
The average surprise over the last 4 quarters remained negative at 11.45%. This implies that Molina has fallen short of the Zacks Consensus Estimate by 11.45% on an average over the last 4 quarters. The outlook is not very bright for Molina. Over the last 30 days, 5 of the 8 analysts following the stock for the first quarter of 2010 have lowered earnings estimates while none have moved in the opposite direction. We have seen similar downward earnings estimates revisions for the second quarter of 2010 as well.
 
Furthermore, estimates have been lowered by 3 of the 4 analysts (over the last 30 days) for fiscal 2010 with no upward movements. This significant downward bias justifies our short-term and long-term recommendations on the stock of Strong Sell (Zacks #5 Rank) and Underperform, respectively. Consequently, we advise investors to avoid the stock both in the short-term as well as the long-term.
Read the full analyst report on “MOH”
Zacks Investment Research