Yesterday, after competitor NIB Holdings Limited (ASX: NHF) announced a 20% profit upgrade for the year, shares of Medibank Private Ltd (ASX: MPL) also shot higher, reaching a new 52-week high of $3.20 before closing at $3.17.
It seems Medibank buyers are hoping that a similar decrease in claim expenses is waiting in the wings for shareholders. With premium (i.e. revenue) increases regulated by the government and the industry itself highly competitive, one of the most effective ways to boost profits is to cut expenses. Medibank has recently experienced some success in this area.
Prospective Medibank buyers should be cautious of NIB's announcement however, since in the past the small company has been able to grow its policyholder numbers at competitors' expense. With Medibank the top dog in the health insurance market, its customer base is a fat target for competitors.
Still not a bargain
Medibank has already told the market that it expects a weaker second half, and its first half profits were inflated by 10% thanks to a $20 million one-off tax benefit. This makes it appear less likely that the company will surprise investors, yet even if it was set to report substantially lower claim expenses, Medibank does not look cheap.
If we exclude the one-off tax benefit and double half-year profit to approximate full-year results, Medibank trades on a price to earnings (P/E) ratio in the mid-20s, which is quite high for an insurer.
With legislated premium increases every year it is possible to construct an attractive investment thesis, but factor in customer policy downgrades, recent loss of market share, the uncertainty of a new CEO and several other factors and I can't be certain that Medibank will be a winning investment at today's prices.
The business itself is solid and I would not sell if I was a shareholder. However, I'm not confident that Medibank today is a significantly better buy than other opportunities out there.
