Medibank Private Ltd (ASX: MPL) was one of the most highly-sought after companies late last year in what was the largest public float since that of Telstra Corporation Ltd (ASX: TLS), reaping the Coalition government an incredible $5.7 billion.
From its opening price of $2.15, the stock soared as high as $2.59 by late February – a 29.5% return for retail investors (who received their shares at a capped $2.00 per unit), compared to a 9.8% return from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) over the same period.
Unfortunately, the excitement was short-lived and those shares have now come crashing back down to earth, finishing last week at $2.06 after having flopped to a record low of $2.03 on Thursday. With that in mind, here are five reasons Medibank Private's shares have faltered, and worse yet, why they could have even further to fall.
- Valuation. It is my opinion that investors who paid $2 per share during Medibank's IPO overpaid for a good, but not great business, while those who then purchased their shares after the IPO were buying into the hype. Even at its current price of $2.06, Medibank trades on a rather lofty 21 times forecast earnings for the 2015 financial year, making it a rather expensive prospect.
- Cost-cutting. The market has also piled expectations onto management to improve operating efficiencies and reduce overall costs. At the time of the IPO, it seemed that investors expected these changes to be made almost overnight, but as they found out in February (when the company produced its first-half results), the changes will take time to implement.
- Management. One of the queries I had at the time of the IPO was if there is the potential to cut costs so considerably, why had management not implemented the necessary changes over the last decade? Indeed, investors must now be questioning whether CEO George Savvides is the right person to lead the changes.
- Forecasts. As highlighted by the Fairfax press, Matt Prior, an analyst at Evans & Partners, recently warned clients of a potential profit downgrade to be provided by Medibank for the 2016 financial year, citing increased price sensitivity among consumers and an accelerated trend of members downgrading their policies. Prior is reportedly expecting 4% growth in profits for 2016, which is 9% lower than the current consensus forecast of 13%.
- Margins. Indeed, this is a real risk for Medibank which is under considerable competitive pressures from rivals BUPA, HCF and NIB Holdings Limited (ASX: NHF). Even its own discount brand, ahm, is attracting consumers away from Medibank-branded policies which will result in a contraction on the group's margins.
Although Medibank's shares have fallen considerably over the last three months or so, there are still a number of reasons why investors should continue to avoid the stock. While it maintains a position on my long-term watchlist in case it falls in price considerably, there are a number of far more compelling opportunities on offer right now.
