Medibank Private Ltd is worth $2.62 says broker: Should you buy?

Macquarie Group Ltd (ASX:MQG) has given Medibank Private Ltd (ASX:MPL) a $2.62 price target. Buyer beware.

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For the record, I still own my Medibank Private Ltd (ASX: MPL) shares.

After registering as a retail investor for my parcel in the IPO, at $2.00 per share, it's fair to say I'm sitting pretty, with a paper gain of 16% in just two months.

But I've considered selling out for a while now because the valuation, especially at its silly season peak of $2.44, is eye-watering.

MPL
Source: Google Finance. Click to enlarge.

Still, stranger things have happened.

And I'm just happy that I've made a short-term capital gain. I'd rather be up, than down.

But I'm not confusing it. I know what it was: luck.

I'm a firm believer that no one can accurately predict the short-term price movements of stocks. I think it's a quick way to the poor house.

No ifs, buts or maybes.

In fact, when I do my analysis I try to be generally right, rather than specifically wrong. And being a value investor requires patience. That is, five years or more.

Whilst I think Medibank holds long-term promise, it isn't cheap at today's prices. A simple comparison to fellow health insurer, NIB Holdings Ltd (ASX: NHF) reveals that much.

In 2015, Medibank is expected to pay just one dividend of 4.9 cents. At current prices of $2.32, that's a yield little over 2.1%.

So with a high share price and low yield, you can imagine my surprise when I read on my Dow Jones news feed that Medibank had been given a share price target of $2.62 by Macquarie Group Ltd (ASX: MQG).

MPL news

That's 13% upside from today's price!

'Targets' are price levels which analysts believe a share will reach some point in the future (e.g. 12-months).

Whilst I think that's a bit generous, let's play along…

If we took the consensus earnings estimates of analysts for Medibank in 2015, which is 11.1 cents per share, it means Medibank would trade on a P/E multiple of around 23.6 when/if it reaches $2.62 and meets analyst expectations.

For comparison the smaller, and more profitable, NIB Holdings currently trades on a forward P/E multiple of 19.

But I don't think NIB is a bargain, either.

I was planning to sell my Medibank shares today but now that I've written about it, I'll have to wait until The Motley Fool's strict trading rules to allow me to.

In my opinion, at $2.32, Medibank is above my fair value estimate of around $2.10. As a result, I do not think it is a good buy. Whilst it's not seriously overvalued, astute investors would be wise to wait for a lower entry point before hitting the buy button.

Motley Fool Contributor Owen Raszkiewicz owns shares of Medibank Private and NIB Holdings. You can follow Owen on Twitter @ASXinvest.

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