All eyes will be on Medibank Private Ltd (ASX: MPL) when it reports later this week with analysts and investors alike eager to determine whether the stock is really worth its asking price. At $2.52, the stock trades on a multiple of 27x last year's earnings, making it much more expensive than other insurance businesses, including health insurance rival NIB Holdings Limited (ASX: NHF).
While Medibank Private made its debut on the ASX less than three months ago, retail investors have already made a stunning 26% paper profit, heavily outpacing the returns from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). Here are four key factors the market will be looking at when the company reports on Friday, 20 February.
- Margins. Over the last three years, Medibank's net underwriting margin has averaged just 4.5%. That compares to BUPA's 6.5% margin, and an industry average of 5.8%. Investors will be looking for a significant improvement to show that the company is becoming more competitive.
- Cost Improvements. Investors will also be focused on any improvements made to the business' cost base. Medibank's CEO George Savvides promised to make cost improvements a key focus over the coming years, which would play a big role in driving earnings growth.
- Earnings. Medibank forecast 6% earnings growth in the 2015 financial year, predicting earnings per share (EPS) of 9.4 cents, up from 8.9 cents per share in 2014. Given the premium at which the stock is now trading, the market will be hoping for an even greater result.
- Investments. Investors will be interested to see just how reliant the insurer's earnings growth is on its investment portfolio. Medibank's sizeable investment portfolio was one concern I had over the business prior to its float with 22% of its profit having been generated by the portfolio – 18% of which is dedicated to more aggressive growth assets (Medibank noted that it was planning on increasing that growth portion to 25%, leaving 75% for more defensive assets).
On that final point, the stock market has performed strongly over the last few months which may boost the company's overall earnings, however, investors should certainly watch this metric over the coming years to ensure the business' earnings aren't too heavily reliant on a bullish stock market.
Medibank is a high quality business, but its current valuation makes it an unattractive investment prospect. Investors would be wise to add the stock to their long-term watchlist and look at some of the market's more compelling opportunities for now.
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