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The bull and bear case for the Medibank Private Ltd share price

The Medibank Private Ltd (ASX: MPL) share price has grown to $2.86, can it keep growing?

Medibank is Australia’s largest private health insurer with a market capitalisation of $7.9 billion. Its share price has grown by 43% since it listed in November 2014.

There are reasons to like and dislike Medibank, here are my reasons for each argument:

The bull case

The private health insurance industry experiences approved average premium increases every year from the Federal Minister for Health. Medibank announced on 10 February 2017 that it had been approved for an average 4.6% increase across all Medibank and ahm insurance products.

The government needs the private health insurance sector to succeed. The more patients that are processed through the private system rather than the public system, the more the government’s finances are improved.

The government has a number of ‘carrot and stick’ measures to ensure people take up health insurance, such as the Medicare Levy Surcharge, Lifetime Health Cover loading and the rebate on insurance premiums.

Medibank managed to eke out earnings per share growth of 1.2% in its half-year result to 31 December 2016, which is impressive considering some of the problems it is up against.

The bear case

It’s worrying that Medibank’s health insurance operating profit decreased by 8.2% in the half-year to 31 December 2016, even with premium increases.

Medibank’s share of the health insurance market is slowly declining and its number of policyholders decreased by 2.3% compared to December 2015. The premium that policyholders are paying is becoming unaffordable for some, particularly the younger generation, who are the most profitable for Medibank.

Medibank can’t afford to lose its younger policyholders as they effectively subsidise the expenses of the older policyholders who have the expensive operations. This could become worse as the ageing population effects become more apparent and there is an increase of expense claims for Medibank.

Somehow, Medibank needs to keep in control of expense claims, whilst growing revenue without increasing the premiums by inflation-busting amounts.

Foolish takeaway

There are a number of reasons to be concerned for Medibank. Between management, the government and the public there is a probably a solution but it’s hard to see how things can be changed at the moment. Medibank is trading at 18x FY17’s estimated earnings with a grossed-up dividend yield of 5.62%.

For now, I’m not buying Medibank shares, I prefer NIB Holdings Limited (ASX: NHF) but I’m wary of the private health insurance industry in general. Instead I’d rather buy these three blue chips in fast-growing industries.

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Motley Fool contributor Tristan Harrison 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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