Medibank Private Ltd (ASX: MPL) has been a hot topic amongst investors since its market debut in November last year. While it was the most highly anticipated float since Telstra Corporation Ltd (ASX: TLS) (having attracted interest from some 750,000 Australians) many have questioned its seemingly lofty price.
Although the stock has retreated steadily this week from $2.40 to $2.32, it still commands a high premium. In fact, at that price it trades on a price-earnings ratio of 24.7 times financial year (FY) 2014 earnings – which is significantly higher than the average S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) company.
While Medibank is a high-quality corporation, it's going to have to work extremely hard to justify its current price tag. Firstly, the company would need to heavily reduce administrative costs and improve its underwriting margins to become more competitive with rivals such as Bupa, HCF and NIB Holdings Limited (ASX: NHF).
In addition, Medibank Private maintains a sizeable investment portfolio which last year generated 22% of the group's overall profit. While this could help drive profits higher if the Australian share market fires up for the remainder of 2015, it's also highly risky – especially considering the headwinds currently facing the local economy.
Naturally, investors will be hoping that Medibank can join the likes of Telstra, Commonwealth Bank of Australia (ASX: CBA) and CSL Limited (ASX: CSL) on the lucrative list of government floats to have delivered enormous returns to shareholders. While that is a definite possibility, investors would be taking a high risk in buying into the stock at its current price.
Although the shares may climb higher in the coming weeks or months, there really is no rush to buy the stock. In order to make a more informed investment decision, investors should wait until the company releases its half-year results in February (or even its full-year results in August) to establish how well it is delivering on its promises.
A much better bet than Medibank Private
One more reason why Medibank Private isn't the best investment today is its 2.1% dividend yield (based on prospectus forecasts). While it's certainly better than nothing, it doesn't begin to compare to some other dividend players.
