Molina Healthcare Shares Face Mounting Headwinds

The stock of U.S. health insurer Molina Healthcare is navigating a challenging period, pressured by persistent medical cost inflation and a lowered profit outlook. Investor sentiment has been further dampened by shareholder lawsuits alleging a lack of corporate transparency.

A significant development adding to the uncertainty is the emergence of multiple class-action lawsuits and shareholder investigations. These legal actions allege that Molina Healthcare failed to disclose deteriorating assumptions regarding medical costs in a timely manner. The suits specifically reference the company's corrected guidance issued in July 2025, which cited "cost pressure across all three business segments." This legal overhang presents an additional risk factor for investors.

Profitability Squeezed by Rising Medical Costs

The core issue impacting the company's performance is a marked increase in medical expenses. Molina's Medical Care Ratio (MCR), its largest cost component, has risen significantly. For the third quarter, the consolidated MCR reached 92.6%, a notable increase from 89.2% in the same period the prior year. This pressure stems from higher spending across several areas, including behavioral health, pharmacy benefits, and both inpatient and outpatient services, which directly compress profitability.

Should investors sell immediately? Or is it worth buying Molina Healthcare?

In response to this trend, management has revised its full-year 2025 adjusted earnings per share (EPS) guidance downward to $14.00. Furthermore, the third quarter financials revealed a negative free cash flow of $186 million, potentially indicating liquidity challenges or significant reinvestment needs.

Valuation Presents a Contrarian Case

Despite these operational and legal challenges, certain metrics suggest the equity may be undervalued. Molina Healthcare currently trades at a price-to-earnings (P/E) ratio of 8.7, which stands well below the industry average of 22.3. Some discounted cash flow models estimate a fair value for the shares near $649. Notably, institutional investors including Cobalt Capital and Centric Wealth Management have recently increased their positions, signaling contrarian confidence in a potential recovery.

The stock's future trajectory is heavily dependent on management's ability to manage the cost environment and meet its revised 2025 targets. The industry anticipates more aggressive capitation rates for 2026 to offset the high claims costs experienced in 2025. A normalization of the MCR and more stable margins in the coming year will be crucial for a sustained rebound in shareholder value.