Medibank Private Ltd (ASX: MPL) has been given a "buy" rating and a price target of $3 by Toby Langley, an analyst from Bank of America Merrill Lynch (BoAML), a 27.7% upside from Tuesday's $2.35 closing price.
While many analysts and investors (myself included) believe the stock is already kicking above its weight at $2.35, Langley has taken a more bullish stance based on the belief that the market is yet to value the stock as highly as private hospital operators such as Healthscope Ltd (ASX: HSO) or Ramsay Health Care Limited (ASX: RHC). As reported by The Australian Financial Review (AFR), Langley said that health insurance businesses existed in "relative symbiosis" with hospital operators, suggesting plenty of upside potential for Medibank.
The high price target also reflects Langley's confidence in the insurer to dramatically reduce its administrative costs and improve its margins. While many other analysts have cast their doubts over Medibank's ability to change its ways and become more efficient, the AFR quoted him as saying there was "considerable room for cost and operational efficiencies".
Should you buy?
Investors need to be aware that there is a lot of hype already built into the stock's price. After all, Medibank's IPO was the most highly anticipated float since that of Telstra Corporation Ltd (ASX: TLS), attracting hundreds of thousands of investors in the process.
To justify its current price tag, Medibank would need to improve its costs and efficiencies considerably over the coming six to 12 months or else the stock could come under heavy selling pressure. While Medibank could certainly be a strong performer over the long-run, there is little margin of safety at today's currency price meaning that investors, who buy, could be assuming an unnecessarily high level of risk.
Right now, there are plenty of other stocks trading at more compelling prices which could deliver far greater returns over the coming years.
