The sell-off of Medibank Private Ltd (ASX: MPL) has continued today with the stock falling to its lowest price since 17 December 2014. The stock is now trading at just $2.26, down 2.6% for the day and 12.7% since peaking at $2.59 in February.
A bargain, or a value trap?
While Medibank was one of the hottest stocks on the market in the months following its initial public offering (IPO), investors have cooled on the company's potential since the release of its first half-year earnings result in February. Investors were hoping for improvements to be made to its management costs and overall efficiencies, although improvements were certainly made, it was perhaps not enough to justify the stock's rather lofty valuation.
Even today, the stock is trading at 24.2x forecast earnings for the 2015 financial year, which is considerably higher than the Australian sharemarket's average price-earnings ratio of just under 15x (according to data from Morningstar) and indicates that high expectations could still be priced into the shares.
While the company's sheer size is an advantage in some ways, it is also a disadvantage in that future growth could become more limited. Indeed, some analysts have questioned the company's ability to grow profits at a decent clip once it has made the necessary improvements to its operating costs and efficiency measures.
Meanwhile, the rapid growth of its discount business, ahm, is also a concern in that it appears to be taking customers from the more expensive Medibank Private brand, resulting in thinner margins being recorded on its policies.
Should you buy Medibank Private?
Just because other ex-government-owned businesses such as Commonwealth Bank of Australia (ASX: CBA) and CSL Limited (ASX: CSL) have generated enormous shareholder returns, doesn't mean that Medibank is a certainty to do the same.
Medibank Private is a high-quality company and one that investors should consider adding to their portfolios, but only if they are presented with the opportunity to pick up shares at a reasonable price. Although it has retreated considerably over the last two months, it is still an expensive prospect at $2.26 and should thus be avoided in favour of some of the market's more compelling investment opportunities.
