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3 reasons to be cautious about Medibank Private Ltd shares

Credit: Phalinn Ooi

Medibank Private Ltd (ASX: MPL) announced this morning that it was unlikely to be able to provide annual tax statements to a majority of Medibank-brand customers by July 15. This is a result of data migration to the company’s new technology platform. Customer data security is intact, and ahm customers will not be affected.

Although not a significant issue, the announcement comes at a time when the company least needed it, following on the back of a lawsuit from the Australian Competition and Consumer Commission (ACCC) over ‘misleading conduct’ relating to Medibank’s failure to notify customers about changes to parts of their coverage.

New CEO Craig Drummond is also still trying to find his feet, and might face some pointed questions from analysts at the company’s results briefing on 19 August. Either way, there are a few reasons to think twice before diving headlong into Medibank:

  1. Its cost-cutting focus and the ACCC investigation

Experience with other companies has shown in the past that there’s often more than one cockroach in the kitchen. I’m not accusing the company of any impropriety, but with the ACCC’s allegations and Medibank’s current focus on reducing claim expenses and cutting costs, there’s surely potential for a further mis-steps over changes to customer cover and claims payments.

  1. A new CEO

A new CEO always brings an element of uncertainty to a company, even though I feel that Mr Drummond is likely a highly capable appointee. He will have his own ideas on how to run the company and arrest the decline in member base. There could be some pain for shareholders during the adjustment period.

  1. It’s not cheap

At approximately 20 times earnings, Medibank Private isn’t exactly a bargain. It’s a good business, with its mandated revenue increases every year, but investors aren’t being afforded a margin of safety, especially with all the uncertainty.

Keep Medibank as a ‘Hold’ for now – or on the watchlist, if you’re not an owner. Instead, consider checking out some of the latest stock picks from The Motley Fool’s team of analysts.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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.

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