Shareholders of Medibank Private Ltd (ASX: MPL) have been truly tested over the last four months with the stock falling more than 20% in that time.
Going into the 2015 calendar year, investors couldn't get enough of the stock and would eventually bid it as high as $2.59 by late February. But it's been all downhill since the private health insurer released its maiden first-half results as a public company with the shares now fetching just $2.07 per unit (after falling to a record low of $2 early last week).
Prior to Medibank's $5.7 billion initial public offering (IPO) in November last year, it was hyped as being the biggest float since that of Telstra Corporation Ltd (ASX: TLS). Investors believed that the insurer could use its sheer size to its advantage whilst also heavily reducing costs and improving operating efficiencies.
While progress was certainly made in the six-months to 31 December 2014, investors finally came to the realisation that any improvements would not be made overnight, but rather over the course of a number of years. As such, the results were not enough to justify the company's lofty valuation, resulting in the recent fall.
Although some investors might argue that now is the opportune time to load up on the insurer's stock, they also need to take a closer look at some of the challenges facing the business.
To begin with, Australian health insurers are faced with rising claims from private hospital operators such as Healthscope Ltd (ASX: HSO) and Ramsay Health Care Limited (ASX: RHC), with claims growing faster than revenues. The result is a rise in premiums for policyholders, forcing consumers to seek discounted insurance products.
Thus, the competitive landscape is heating up which could put further pressure on Medibank Private's margins and position within the industry compared to rivals such as NIB Holdings Limited (ASX: NHF) and HCF.
Even at $2.07, Medibank Private's shares are trading on a multiple of roughly 22x forecast earnings for the 2015 financial year, making it an expensive prospect. Given the headwinds facing the business and the industry as a whole, investors should simply add the company to their watchlist and wait for a much better opportunity to buy the shares.
In the meantime, there are plenty of other great opportunities presenting themselves.
