Medibank Private Ltd (ASX: MPL) shares recently sank to a 2015 low of $2.28, prompting investors to question whether now's the time to buy the personal insurance group.
At 14% above the retail IPO price, trading on a trailing price to earnings ratio of nearly 25 and a forward dividend yield of around 3%, I don't see much value!
Some investors justify the current price based on its dominance of the local insurance industry, popularity among self-managed super funds, and potential upside from cost cutting, but I'm not so sure.
3 Reasons it's NOT a Bargain
- Medibank's dominance and profit margins may not last. The market is being flooded with low-cost, low margin competitors that are threatening Medibank's premium service. Medibank itself has even launched a low-cost brand, which could result in lower margins and cannibalisation of high-margin customers.
- Analysts are predicting earnings per share appreciation of around 5% in the 12 months to the 30 June 2015 and a further 12% in the year to 30 June 2016. In my view, paying a price to earnings ratio of 25 for that level of growth is not a smart investment decision; the downside risk is too high.
- Medibank's metrics compare poorly to peers. NIB Holdings Limited (ASX: NHF) offers a similar yield but a lower price to earnings ratio and greater forecast earnings growth, while QBE Insurance Group Ltd (ASX: QBE) offers a 3.5% yield and 20% earnings per share growth forecast at a price to earnings ratio of just 16.
