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Top broker downgrades NIB shares to a sell rating

The NIB Holdings Limited (ASX: NHF) share price has been in stunning form in 2019.

Since the start of the year the private health insurer’s shares have gained a whopping 55% and currently trade within a whisker of their all-time high.

Is it too late to invest?

According to one of Australia’s leading brokers, it could be too late to buy NIB’s shares.

A note out of Goldman Sachs this morning reveals that its analysts have downgraded the company’s shares to a sell rating with a price target of $5.63.

This price target implies potential downside of ~29% over the next 12 months excluding dividends.

Its analysts said: “Whilst the election outcome was undoubtedly positive for the industry, we expect only limited reprieve to the outlook for earnings. Recent reform measures are having little positive impact, policyholder/mix pressures remain unchanged, and we expect that near term rate increases will be kept <3%.”

In light of this, the broker believes “holding margins will remain difficult and we don’t see this being reflected in current valuation.”

Goldman notes that NIB’s shares are now changing hands at 25x forward earnings, which is the highest point over the last decade.

It added: “For NHF’s P/E to return to even the top end of its long run trading range, this would imply c.25% earnings upgrades, or roughly 250bps of ARHI margin expansion, i.e. improvement toward a c.9% net margin, or roughly 200bps above the FY18 result.”

Which is not something that it believes will be possible.

It isn’t just NIB that Goldman Sachs is negative on. It has a sell rating and $2.68 price target on Medibank Private Ltd (ASX: MPL) shares for similar reasons.

Instead of Medibank and NIB, the broker thinks that investors should consider gaining exposure to the insurance industry through Suncorp Group Ltd (ASX: SUN).

It currently has a buy rating and $14.23 price target on the insurance giant’s shares. This implies potential upside of 7.5% for its shares over the next 12 months excluding dividends.

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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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