Despite its somewhat lofty valuation, it has been suggested that the Medibank Private Ltd (ASX: MPL) share price could still have a long way to go before it cools its jets.
As it stands, the stock is trading at $2.39 on a price-earnings ratio of 25.5 times financial year 2014 earnings. While retail investors received shares for $2.00 in the November float, the stock has since traded between a range of $2.08 and $2.44.
At its current price, many analysts and investors have become cautious of just how expensive the stock is. While Medibank is a good company, it would need to cut costs and improve efficiencies considerably to justify its high price tag.
Yet despite these views, one broker has given the stock a price target of $2.62 while another analyst from Bank of America Merrill Lynch (BoAML) has said the stock could be worth as much as $3.00. Those two targets would suggest that Medibank's shares could still have between 9.6% and 25.5% left to climb.
Of course, anything is possible. If management quickly pulls through on its promise to improve administrative costs then the stock could certainly reach for those heights. But then again, a lot of hype is already priced into the shares, so should management fall short on the market's expectations, the stock could just as likely retreat – heavily.
While it's always encouraging to have the 'experts' talking a stock up, there is certainly no guarantee that their forecasts will be correct. Right now, there is little margin of safety for investors who decide to buy Medibank shares, meaning that they could be assuming an unnecessarily high level of risk.
