Shares of Molina Healthcare (MOH) are falling after Stifel analyst Thomas Carroll downgraded the stock to Sell from Hold, citing current valuation. He believes the stock's price underestimates the lift required to expand margins as well as risks to company revenues, while overestimating the chances of the company selling itself in the near-term. Carroll, however, raised his target price on Molina to $60 from $47.

BACKGROUND: After Joseph White was named as interim president and CEO to replace J. Mario Molina and as CFO to replace John Molina on May 2, shares rose as analysts cited new management as a catalyst for margin expansion and a potential takeover.

TOO FAR, TOO FAST: Stifel analyst Carroll said in his new note to investors that while earnings power of normalized margins on projected revenues is significantly larger than current expectations, he disagrees with the expected pace at which management can expand margins and does not have "comfort in the required actions to get there." He added that despite management changes, the operational structure Molina has had during its underperformance is still intact, making significant margin improvements "overly hopeful." Carroll also questioned the company's ability to achieve better revenues, citing rebid risk and a weak request-for-proposal success rate. He said he expects dilution and pressure to prevailing rates as Molina is currently facing six rebids across five markets representing approximately 1.6M lives and $6.1B in revenue.

REGULATORY RISK: Carroll said while the outcomes of healthcare reforms in D.C. remain uncertain, Republicans will clearly target Medicaid, putting Molina at a potentially disproportionate risk. He added the company's largest non-Medicaid unit is health insurance exchange products, which is not "the most certain/stable of businesses."

POTENTIAL TAKEOVER: Carroll said investors are overestimating the chances of a near-term sale of Molina, saying while the Molina brothers are no longer executives, they still serve as board members who own roughly 23% of the company and recent communications suggest new management is focusing on improving consistency. Carroll argues even if the company was to go up for sale, there are other more diversified, lower-risk assets available. Carroll said he has no knowledge Molina is in talks with potential suitors. He believes Wellcare (WCG) does not have a near-term interest in the company, Cigna (CI) is likely to turn to another government-focused managed care organization if it seeks a deal, and Aetna (AET) would offer a price that would "not likely meet the expectations" of the seller.

PRICE ACTION: Near noon, Molina Healthcare shares have dropped 4.2% to $63.51.