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Share price of NIB Holdings Limited (ASX:NHF) takes off at expense of Ramsay Health Care Limited (ASX:RHC)

share price rocket

The best performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) today is private health insurer NIB Holdings Limited (ASX: NHF) and shareholders can thank Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) for this.

The share price of NIB surged 5.3% in afternoon trade to a more than one-month high of $5.79 and that puts it at the top of today’s league table with oil producer Beach Energy Ltd (ASX: BPT) and nickel miner Independence Group NL (ASX: IGO) coming in second and third with gains of 4.7% and 3.6%, respectively.

NIB has lots of room to keep climbing too, given that it has slumped 14% since January as opposition leader Bill Shorten threatened to cap premium increases if Labor won the upcoming federal election.

Its rival Medibank Private Ltd (ASX: MPL) hasn’t fared much better either as it shed 11% in value over the same period, although sentiment may be turning following the profit warning by hospital operator Ramsay.

Ramsay announced last week that its UK and Australian operations have been weaker than expected and that its core earnings per share for FY18 would only increase by 7% versus management’s earlier growth guidance of between 8% and 10%.

Deutsche Bank upgraded its recommendation on NIB to “buy” on the back of Ramsay’s trading update and slapped a $6.55 a share price target on the health insurer.

“The hospital operator stated that it was seeing ‘weaker growth rates in procedural work and inpatient admissions in its Australia operations’,” said Deutsche.

“This is consistent with broader industry data which suggests PHI [private health insurance] claims growth had slowed to 3.0% in the 12 months to March, down from its 7% average growth over the past 5 years.”

Health insurers have been battling with hospital operators to cap sharply rising costs and recent media publicity on the large out-of-pocket charges that patients are being asked to swallow have put the blame on doctors and not on insurers.

A regulatory cap on insurance premium growth is much less of a worry to investors if costs are well controlled.

From that perspective, I would favour health insurance stocks over hospital operators, particularly given that I cannot see any near-term catalyst for the hospital sector that is facing several headwinds.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended NIB Holdings Limited and Ramsay Health Care Limited. 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 Scott Phillips.

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