Is Medibank Private Ltd a bargain after dropping 27% from its high?

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.

Alternatively, these rapidly growing companies could prove to be even better investments. Each is growing its earnings and dividend at a rapid clip and could climb higher in the next few months if you ask me.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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