Checking out the price of Medibank this morning, I noticed a curious article linked in Google Finance; ‘Medibank Private Can’t Be More Safe‘. Asides from reading like it was written by a computer and containing a price target of $4.43 in my humble opinion it’s rubbish, and the headline raises some interesting questions for investors.

What can you expect when you buy Medibank shares?

Security, yes, but investors expecting capital growth are likely to be disappointed. As the biggest player in the Australian market and with government legislation capping its revenue increases, Medibank will struggle to grow its market share and its top line.

Thus, its growth mostly comes from cutting costs and operating more efficiently. Medibank could take market share, and theoretically as the biggest player it should be stronger than competitors like Bupa and NIB Holdings Limited (ASX: NHF), but Medibank has been losing customers to competitors in recent times.

Buyers can expect reliable dividends thanks to the defensive nature of the business, and Medibank’s growing ‘float’ (investment portfolio) will help support the business’ security over time. Short-tail insurance operations that see Medibank’s coverage limited to 12 months also help limit the company’s vulnerability to surprises.

Expecting large capital growth however, would likely be a mistake. The health insurance market is very competitive and Medibank has had well-publicised troubles retaining customers, as well as a recent investigation into some of its changes to customer cover.

No bargain

At above $3 a share, Medibank buyers are implicitly factoring in either significant cost cutting in addition to what was done this year, and/or significant improvement in its sales to customers. I could be wrong, but I can’t see a catalyst for an uplift in customer numbers and one wonders how much more can really be cut.

There’s only so much pressure that can be applied to healthcare provider partners like Healthscope Ltd (ASX: HSO) and Primary Health Care Limited (ASX: PRY) before the competition watchdog gets interested – remembering that a similar thing happened to Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) not so long ago.

I’m not convinced there’s enough of a margin of safety to make Medibank a ‘Buy’ today, although there’s also no compelling reason to sell. However, if shares do manage to hit $4.43 any time in the near future, owners should consider cashing in their chips.

3 Rotten Shares to Sell, and 1 to Buy Today

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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.