Shares in leading health insurer Medibank Private Ltd (ASX: MPL) soared to a new all-time high of $2.97 per share yesterday as investor optimism grows on the back of recent premium increases and the appointment of new CEO Craig Drummond, formerly of National Australia Bank Ltd. (ASX: NAB).
Mr Drummond will commence his position on 4 July. Outgoing CEO George Savvides retired on Friday April 1 and Mr David Koczkar, Medibank's Chief Operating Officer (COO) will act as CEO until Mr Drummond takes over.
As discussed in the linked article, above, Medibank's new CEO appears a sound appointment. The real question for shareholders and potential investors is whether there is any value to be found in Medibank today.
In the company's most recent interim report, it revealed a profit of $227 million (operating profit of $271 million) and management guided for a full-year operating profit of above $470 million. This appears to put Medibank on a Price to Earnings (P/E) ratio of around 20, roughly in line with other major insurers. Second half profit is expected to be lower as a result of increased investment in marketing; excluding this, Medibank appears to trade around fair value.
Unfortunately, growth depends predominantly on Medibank's ability to restrain costs, and this kind of activity was behind the recent profit upgrade. Other viable avenues include growing sales of higher margin products or taking market share – but Medibank has been moving in the opposite direction with these metrics recently.
Strong competition from privately-owned Bupa in particular has been successfully eroding Medibank's market leadership, while the rising cost of health insurance is reportedly behind the loss of customers from Medibank's eponymous insurance brand to its lower-priced ahm product.
Foolish takeaway
With increased investment in marketing and a new CEO, Medibank is set to tackle competitive forces in the market as well as issues within the company and the wider healthcare system. However, with strong competition and a number of issues to be faced, I consider Medibank to be a solid 'Hold' today.
