Medibank Private Ltd (ASX: MPL) will announce its interim results to the market on Friday, 20 February, in what will be one of the most highly anticipated reports this earnings season.
Although it listed on the ASX less than three months ago, retail investors who bought shares in the float are already sitting on a 27% paper profit. The shares closed at $2.54 on Wednesday after reaching a new all-time high of $2.57 earlier in the session.
At that price however, the stock is trading on a price-earnings ratio of 27.2x last year's earnings. With many analysts concerned about how much the stock has risen, investors will be looking for reasons to justify its rather lofty price. Here are some of the things you need to be aware of before Medibank Private reports tomorrow…
Costs. Investors will be looking out for cost reductions which have hindered Medibank Private's earnings in years gone past.
Margins. Medibank Private will need to improve its margins to become more competitive. Its net underwriting margin has averaged 4.5% over the last three years, significantly lagging behind the margins recorded by rivals such as BUPA and NIB Holdings Limited (ASX: NHF).
Earnings. The insurer forecast earnings growth of 6% this financial year, indicating earnings per share of 9.4 cents. Given the stock's valuation, investors will likely be looking out for a revised earnings guidance.
Core business. Medibank Private has a much larger and more aggressive investment portfolio than most other insurers, and relies on this to drive profit growth. While the company should benefit from the market's recent strength, investors should ensure strong growth is also being recorded in Medibank's core business.
Dividends. Investors should not expect a dividend to be announced. As outlined in Medibank Private's prospectus, it expects to pay its first dividend in September 2015, equating to 4.9 cents per share (fully franked). That gives the stock an expected 1.9% dividend yield.
Medibank is a good company but, at today's price, would be best left on your watchlist. Until the company is able to justify its lofty valuation, there's another stock which could be a much (much) better buy today.
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