Investors who picked up shares of Medibank Private Ltd (ASX: MPL) during its November float are still sitting in the black, but their gains are quickly falling away with the stock now trading around a record low.
After having closed at $2.14 on Friday, below the $2.15 price that institutions were forced to pay, the stock has retreated 2.8% today to trade at $2.08. It has now fallen nearly 20% since peaking in late February, while it hasn't traded this low since its second day (26 November) as a public entity.
What's gone wrong?
Medibank's fall from grace hasn't been because it's a poor company (it's not), but rather because of the valuation at which the shares traded. As the biggest public float since that of Telstra Corporation Ltd (ASX: TLS), Medibank generated an enormous amount of hype within the market which allowed the Abbott government to sell the business at a considerable premium, fetching $5.7 billion in the process.
Indeed, many investors were of the belief that the company could drastically reduce costs and improve operating efficiencies to justify its lofty price, but they are now realising that it will be a slower process than first anticipated, with potential speed-bumps along the way.
Meanwhile, there's the added worry that competitors such as BUPA, HCF or NIB Holdings Limited (ASX: NHF) could gradually steal market share away from Medibank as a result of higher premiums for health insurance. Even Medibank's own discount ahm brand will likely impact the company's margins and overall earnings potential as it attracts customers away from Medibank-branded products, which attract higher premiums.
This is a key concern facing shareholders, and could see earnings growth stagnate sooner than expected. As highlighted by the Fairfax press, Morgan Stanley analyst Daniel Toohey is expecting policy lapse rates to increase to 15% from 10% and estimates that the shares may only be worth $1.85, representing a discount of 11% compared to today's price.
Should you buy?
Although analysts are by no means always correct in their estimates or convictions, there are certainly headwinds facing Medibank Private which could threaten the investment thesis. While it might be worth holding onto your existing Medibank Private shares, investors may want to refrain themselves from purchasing any more at today's price with further falls seeming increasingly possible.
