Fairfax media reported some interesting analysts' opinions on the value of Medibank Private Ltd (ASX: MPL) shares this morning.
The What:
Specifically, Morgan Stanley analyst Daniel Toohey thinks the stock could be worth as little as $1.85 because rising lapse rates (customers letting policies expire) and growth in the lower-premium ahm insurance range will test the company's profitability.
Morgan Stanley concluded that the market could be overestimating Medibank's earnings per share by as much as 30%.
On the other hand, Macquarie Securities published a $2.65 price target on Medibank, stating in the accompanying note that moderating claims growth combined with increases to premiums would support a positive net margin outlook for the company.
So What?
Medibank increased its premiums by an average of 6.59% across all of its brands this year. That's a fairly sizeable increase, especially given that wages growth is below 3%, and it supports Mr Toohey's claim that continued growth in Medibank's lower-margin ahm brand could stifle profits.
It also supports Morgan Stanley's assertion that the number of Medibank policyholders downgrading their cover or allowing it to lapse will increase, further pressuring margins. Given that the core Medibank brand (with higher margins) makes up 90% of the company's premiums, it's easy to see how customer switching could impact profits.
That doesn't even take into account the potential for competition from Bupa, NIB Holdings Ltd (ASX: NHF), and the rising number of online health insurers.
Now What?
Certainly Morgan Stanley's report presents a compelling case, and if Medibank shares trade as low as $1.85 it will be the end of the world for many shareholders, who probably hoped for a quick trip to $10/share and an early retirement.
Readers should remember that price targets don't tell the full story, and presumably those who bought shares in Medibank did so for a number of reasons:
- It's a great company, with a powerful brand and strong market presence
- Room for efficiencies and improvement now that it is publicly owned
- Legislated premium increases, which should lead to tidy (if steady) profit growth assuming Medibank can maintain customers + margins
Hopefully all shareholders have an investment thesis that is vaguely reminiscent of the above three points. Based on what we've seen of the company so far, there's nothing that would invalidate any of those points.
Shareholders are best served sticking to their guns at this point, because investing is a journey – not a destination – and so it is with Medibank Private shares.
