Health insurance giant Medibank Private Ltd (ASX: MPL) released its first set of financial results as a public company on Friday, confirming it was on target to achieve its full-year profit forecast of $258.2 million.
For the six months ended 31 December 2014, Medibank's pro-forma net profit was $151.2 million (up 10.8%), it was driven by premium revenue growth of 5.2%. Importantly, the insurer also improved its operating margins somewhat, from 4.5% to 5.9%, while its Management Expense Ratio fell from 9.2% to 8.0%.
Under normal circumstances, the results presented by Medibank Private would likely have been applauded by investors, yet the stock fell by as much as 7.4% shortly after the announcement was made. While management's warning of "health insurance industry headwinds" would have been a factor in the market's reaction, it's also likely that investors had simply been hoping for better.
High expectations
Since Medibank Private listed on the ASX on 25 November 2014, numerous analysts have expressed their concerns over the stock's lofty valuation. While most can recognise the company's quality, few are brave enough to say the stock is a "buy" with confidence, given that the stock has traded on a price-earnings ratio of more than 27x last year's earnings. By comparison, NIB Holdings Limited (ASX: NHF) trades on a price-earnings ratio of 23x, while the average S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) trades on a price-earnings of 16x.
The fact is, an enormous level of hope and anticipation had been baked into Medibank Private's stock price, and the results reported by the health insurer simply weren't good enough to justify that high price. While Medibank Private can continue chipping away at those costs and improving its efficiencies, the 'headwinds' that management referred to are also a threat to the insurer's future earnings stream which casts further doubt over the stock's ability to keep climbing.
Even now with the stock trading back at $2.47 it still seems far too expensive. For now, it seems that investors would be better off adding the company to their watchlist and waiting for the stock to fall back in price before hitting the 'Buy' button.
