Molina Healthcare's Recovery Stalls with Q4 Collapse and Guidance Slash

What happened

Molina Healthcare, already in a pronounced earnings squeeze with a consolidated medical cost ratio (MCR) peaking at 92.6% in Q3 2025 and 2025 EPS guidance cut to around $14, reported a disastrous Q4 2026 with a 94.6% MCR and net loss. The company slashed its 2026 EPS guidance to $5, far below the DeepValue report's base case expectation of recovery toward $17-$18 by 2027. Management's assumption of 5% claims inflation lacks credibility given recent underestimates and industry-wide utilization pressures, undermining confidence in their margin control capabilities. New RFP wins, including a $6 billion Florida contract adding $9 billion in 2026 premiums, introduce substantial risks of underpricing and adverse selection that could exacerbate earnings volatility. This acceleration of operational deterioration validates the DeepValue report's caution but suggests a more severe and immediate challenge to the recovery narrative.

Implication

The Q4 2026 collapse confirms that Molina's margin recovery thesis is faltering, with MCR reaching unsustainable levels and EPS guidance collapsing to $5, well below prior thresholds. Management's optimistic claims inflation assumptions appear disconnected from reality, raising concerns about further guidance cuts if cost trends persist. New contract wins, while boosting top-line growth, may dilute margins due to integration challenges and potential underpricing, limiting near-term earnings upside despite revenue additions. Given the stock's volatility and lack of margin visibility, the attractive entry point suggested in the DeepValue report at $160 may need downward revision, with the bear case scenario of $140 becoming more plausible. Overall, maintaining a 'wait-and-see' approach is prudent, focusing on quarterly MCR trends and management's execution on revised guidance before considering any position.

Thesis delta

The DeepValue report's 'WAIT' rating is reinforced, but the thesis shifts more bearishly due to the accelerated earnings collapse and lower guidance. Previously, the base case assumed gradual MCR improvement from 2025 levels; now, the risk of sustained high MCR above 92% and sub-$10 EPS increases, making the bear case more probable and delaying any potential recovery timeline.