The Motley Fool

COVID-19 could double income of this defensive growth ASX 200 stock

ASX investors are getting a much needed-reprieve from the COVID-19 onslaught that wiped around $600 billion from the share market over the past few weeks.

While the volatility on the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) isn’t expected to ease anytime soon, experts agree that the stocks investors should be putting on their “buy” list first are quality defensive stocks that can pay a dividend.

One stock that should be on investors’ radar is private health insurer Medibank Private Ltd (ASX: MPL), according to Credit Suisse.

Medibank’s big profit boost

The broker upgraded the stock by two full notches to “outperform” from “underperform” as it is forecasting a near-term earnings upside for the company.

“We now have increased confidence that there will be a claims holiday for the Private Health Insurance (PHI) industry in coming months,” said Credit Suisse.

“While investors may be disappointed by the March quarterly data, due to a pull forward of health insurance claims, the June quarter has the potential to deliver a significant benefit for the insurer.

“This could result in a near doubling of their domestic insurance operating profit.”

Expected drop in insurance claims

The government is rushing through elective surgeries in order to free up hospital capacity to deal with the expected influx of coronavirus patients. Private hospitals, like those owned by Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) may be roped in to help.

This means the number of such surgeries will drop off significantly over the coming months as our hospital system is inundated with COVID-19 cases.

That should mean a drop in hospital claims, although Credit Suisse thinks that will be partially offset by investment income and elevated international insurance claims for Medibank.

Earnings upgrades

Nonetheless, the broker lifted its FY20 underlying net profit forecast for Medibank by 26% and increased its 12-month price target on the stock by 20 cents to $3 a share.

Its competitor NIB Holdings Limited (ASX: NHF) isn’t expected to benefit as much and Credit Suisse sees downside risk to NIB’s profit in the current half.

“Post a claims holiday comes a claims spike, as, unlike discretionary spends, medical issues can often not be cancelled completely, just delayed,” added the broker.

“While a potential earnings headwind into FY21, this could be the exact catalyst that MPL needs to bring about regulatory change and industry consolidation.”

Foolish takeaway

The thinking is that federal and state governments may need to step in to help the hospital sector recover from a huge backlog of elective and other surgeries after the pandemic is overcome.

This could save the industry from a painful spike in claims in the next financial year, with Medibank well placed to benefit from such a move.

Medibank checks many boxes, according to Credit Suisse. This includes a potential earnings upgrade and a debt-free and clean balance sheet. These qualities are hard to find in the current environment.

NEW. The Motley Fool AU Releases Five Cheap and Good Stocks to Buy for 2020 and beyond!….

Our experts here at The Motley Fool Australia have just released a fantastic report, detailing 5 dirt cheap shares that you can buy in 2020.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading over 40% off it's high, all while offering a fully franked dividend yield over 3%...

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click here or the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!

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.