Although its shares have provided a solid year to date return of 13%, shareholders of Medibank Private Ltd (ASX: MPL) are likely to have mixed feelings on 2016.
Early in May, its share price bolted to an all-time high of $3.32. But since then it has slowly but surely been giving back those gains, dropping almost 27% off its high in the process.
Because of this decline its shares are now being outperformed by rival NIB Holdings Limited (ASX: NHF) which has gained a massive 39% so far this year.
The reason for the decline in Medibank's share price can largely be attributed to its full year results released in August. Although net profit after tax rose a stunning 46% to $417 million, management's outlook for the year ahead will undoubtedly have concerned investors.
In the company's investor presentation management revealed that it expects its FY 2017 operating result to be negatively impacted by slower market growth, lower legislated premium increases, and continued market share loss in the year ahead.
As a result, analysts are only expecting earnings to increase by 2.6% year on year in FY 2017, compared to the 12.4% increase expected by NIB Holdings according to CommSec.
This level of growth was clearly not enough to justify paying upwards of 21x earnings for its shares, therefore it comes as no surprise to see its share price take a dive.
But with its shares now changing hands at just over 15x estimated FY 2017 earnings and expected to provide a fully franked 4.7% dividend, I believe it could be a great time to make a long-term buy and hold investment in Medibank.
The year ahead looks to be one a tough one for the private health insurer, but things are expected to pick up thereafter. Investors that are willing to be patient may find themselves rewarded handsomely with an investment in Medibank in my opinion.
