Should you buy Medibank Private Ltd today?

Medibank Private Ltd (ASX:MPL) may look cheap at $2.07 but downside risks appear to outweigh the potential upside. Investors need to consider their exposure to the group carefully coming up to the reporting season.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Medibank Private Ltd (ASX: MPL) appears to have the market confused. After surging from the institutional IPO price of $2.20 in November 2014 to nearly $2.60 February, Medibank's share price has steadily declined to within touching distance of $2.00 per share, the retail IPO price.

The reason for the fall appears to be a consensus among sharemarket analysts that Medibank will struggle to hit its prospectus forecast for both growth and gross margins, potentially a major issue. The interesting thing is that the same analysts believe the shares are worth $2.40 and still worth buying at current prices.

Should you buy Medibank Private Ltd today?

The million dollar question, for those with that kind of money, is what the long-term outlook is like. Analysts, in order to justify the lofty price target, appear to be taking a very long-term view of the company's ability to negotiate better deals with hospitals and therefore improve gross margins.

The theory is that Medibank is in a position of power due to its 30% market share of the local private healthcare market, and hospital operators like Ramsay Health Care Limited (ASX: RHC) and Healthscope Ltd (ASX: HSO) will bend over backwards to make sure Medibank doesn't walk away.

There's merit to this theory, however there are also risks. Medibank may well be in a position of power but so are Healthscope and Ramsay for different reasons. Sure, Medibank's customers will be disappointed if they can't get maximum benefits at hospitals operated by Ramsay and Healthscope, but equally those customers could be significantly disadvantaged by Medicare's tough stance, particularly in regional areas where hospital choices are limited. This could see Medibank's customer numbers fall in localised areas.

Maybe you should sell Medibank?

The analysts at UBS earlier in the year acknowledged the downside risk inherent in Medibank's model and rated the company a SELL. The group did note that claims growth moderated and margins stabilised in the most recent quarterly statistics, however they see Medibank's customer lapse rate as a serious concern.

The team at Morningstar also noted following the first half result that "…softer than expected premium revenue growth is concerning and is likely to continue as policyholders downgrade product features and or increase churn rates."

Full-year reporting

Analysts will watch a few major signposts in the full-year results, due in August. They are gross margins, revenue growth, and lapse rates. Lapse rates will be of particular concern as Medibank was granted a 6.59% premium increase at the last review, at a time when wage growth and inflation is struggling to rise above 2.4%. This is making health insurance more difficult to maintain and will FORCE consumers to move to lower-cost brands.  This is evidenced by Medibank's core brand lagging behind the industry growth rate by around 3%, while the low-cost AHM brand saw policyholder numbers increase by 20% over the 12 months to December 2014.

Motley Fool contributor Andrew Mudie has no position in any stocks mentioned. You can find Andrew on Twitter @andrewmudie The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »