Shares in Medibank Private Ltd (ASX: MPL) took a tumble after its most recent results, falling from highs of $3.20 earlier this year to today's prices of $2.65 a share. I'm still not convinced they're an opportunity however, and here's why:
- Customers are downgrading their level of coverage
- The company is losing market share to competitors
- Market share decline accelerated rapidly in the second half of last year
- The industry itself faces headwinds
- Medibank's outlook is for continued market share loss, slowing market growth, and increased investment in 2017
Problems in the health insurance industry at large
I was interested to note that NIB Holdings Limited (ASX: NHF) reported in its own results that the rise in health insurance premiums is actually due to an increase in the amount of healthcare treatment customers are seeking, rather than the growing cost of those treatments.
If that's the case, there's really no choice but for premiums to continue to rise. Yet rising premiums continue to drive customers to downgrade, and the population's overall level of health insurance coverage has remained stagnant for years, and may even be falling.
Not a buy
Above $3, Medibank was definitely overpriced, as it seems investors were expecting the company to be able to continue to cut costs, which would cause profits to rise and thus justify higher share prices. While that did happen – and the cost base may even improve further in coming years – the customer focus looks to have been neglected and this is starting to nibble away at Medibank's supremacy.
New CEO Craig Drummond has a plan to tackle this, which includes linking the company's Net Promoter Score (NPS) to executive remuneration as well as a number of other improvements. Customer satisfaction and value will be key to success going forwards. Higher investment in the company and its brand may constrain dividend growth in the near future, however.
Still a hold
Loss of market share is a concern, and if the company's latest initiatives are not able to plug the leaks then I would consider selling. Investors also need to be sure not to overpay for Medibank given that insurance stocks can traditionally deliver lumpy earnings as claim costs vary from year to year.
Still, Medibank has a great balance sheet and its dividend appears highly reliable – not to mention there's great industry tailwinds in terms of growing premiums. Although I'm not a buyer, I also don't see a compelling reason to sell, if you're interested in defensive, dividend-paying businesses.
