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Why I think Medibank and NIB shares are cheap today

Doctor pressing digitised screen with array of icons including one entitled health insurance
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ASX earnings season is in full swing. Many ASX blue chips have already reported to their investors and this is set to continue this week, with companies like Woolworths Group Ltd (ASX: WOW) and Ramsay Health Care Limited (ASX: RHC) in line to deliver their results. A lot of companies have surprised to the upside (such as WiseTech Global Ltd (ASX: WTC)) and have subsequently been rewarded with their share prices racing higher. Others have had less fortune.

Two such shares in the latter group are the private health insurance providers Medibank Private Ltd (ASX: MPL) and NIB Holdings Limited (ASX: NHF).

Medibank shares plunged more than 5% last week when the company announced a 30% drop in profits.

Similarly, the NIB share price is down more than 8% today after the company reported its own earnings this morning. It also told investors profits were down more than 25% year on year, which doesn’t elicit a lot of confidence.

But these results (and subsequent share price movements) have also highlighted these two companies’ valuations today. On current prices, Medibank shares are more than 20% down from the all-time highs the company was commanding around this time last year. Similarly, the NIB share price is down more than 44% from its own highs around a year ago as well.

Considering the S&P/ASX 200 Index (ASX: XJO) is itself ‘only’ down around 14% from its all-time high today, does this mean private health insurers are undervalued right now?

Why private health shares have been punished in 2020

Well, as you might suspect, it has a lot to do with the coronavirus pandemic. The public health crisis has had a deleterious impact on the private health industry. Elective surgeries have had to be postponed or deferred as space in the hospital system has been prioritised towards the pandemic in recent months. That, in theory, should have led to a boon for private health insurers, who now don’t have to fork out for these operations. But what has happened is that many customers have ditched their cover altogether in recent months, not willing to pay premiums for care that isn’t available.

In its earnings report, Medibank told investors that more than 28,000 customers suspended their policies between 23 March and 30 June 2020. Further, both Medibank and NIB have delayed the annual premium increases for their customers that they were entitled to pass on. That has been great for consumers, but not for these companies’ bottom lines. Medibank alone estimates this move cost the company around $80 million.

But here’s why I’m still bullish on these private health insurers and why I think the current Medibank and NIB share prices are looking attractive.

A bull case for NIB and Medibank shares

Private health is here to stay. The government simply can’t afford for everyone currently using private health to ditch it and solely rely on the publicly-funded Medicare. That’s why there are numerous tax incentives and rebates to encourage private health insurance. There are also sticks as well as carrots. If you earn above a certain threshold, most people will pay a Medicare Levy Surcharge if you don’t have private health cover.

I like the idea of investing in companies that benefit from government policy shepherding in new customers and taxing anyone who walks away. And I’m confident there will be more ‘carrots and sticks’ employed if things don’t go back to normal for private health insurers soon. We have an ageing population people! It’s in the government’s interests to grow this industry. And that’s why I think the NIB and Medibank share prices are going hot today.

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Sebastian Bowen owns shares of Ramsay Health Care Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of WiseTech Global. The Motley Fool Australia owns shares of Woolworths Limited. 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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