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Top broker downgrades NIB shares to a sell rating

The NIB Holdings Limited (ASX: NHF) share price has been a strong performer on the ASX 200 over the last three months.

Since hitting a 52 week low of $4.64 on December 11, the private health insurer’s shares have rallied an impressive 27% higher.

Can this strong run continue?

One broker that isn’t sure that this strong run can continue is Goldman Sachs.

According to a note out of the investment bank this morning in relation to the Australian insurance industry, its analysts have downgraded NIB’s shares to a sell rating from neutral.

The broker made the move largely on valuation grounds after the company’s shares rallied around 10% higher than its price target of $5.48.

In addition to this, its analysts remain reasonably bearish on the health insurance industry.

This is due to concerns over a number of challenges that the industry faces in the coming months. These include the pre-election release of the terms of reference for the Labor party’s Productivity Commission, the outcome of the Federal election and industry design/implementation of the premium-cap, and the initial draft of APRA’s new PHI capital standard.

Goldman suspects that these will be a negative for NIB and rival Medibank Private Ltd (ASX: MPL) and could weigh on margins and lead to a revision of their medium term strategies.

In light of this, the broker feels that the valuations of both these companies are once again looking stretched. Incidentally, Goldman has a sell rating and $2.48 price target on Medibank’s shares.

Which insurance share does Goldman Sachs like?

The broker’s preference in the insurance industry right now is Suncorp Group Ltd (ASX: SUN). It has a buy rating and $14.65 price target on the insurance giant’s shares due to margin expansion opportunities and an attractive earnings per share growth outlook.

While NIB and Medibank may have been named as sells, here are three shares rated as buys.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended NIB Holdings 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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