Results season is always telling – that's why they name the weeks leading up to it as 'confession season'. Investors get a good look at the companies' books, with which they can form their (often diverse) opinions on where the business is headed.
Here's my take on three businesses that I find too pricey to consider buying after my recent look at them:
Medibank Private Ltd (ASX: MPL)
Despite its recent bumper profits, Medibank's results revealed a loss of market share due to competition as well as a poorer outlook for 2017, with increased investment likely to drag down earnings. The healthcare industry is widely (and accurately) seen as having attractive long-term tailwinds but Medibank is vulnerable to the rising cost of healthcare as well as declines in the level of coverage among the wider population. Customers are also trying to spend less on their insurance as cost has become a critical consideration.
Despite the recent 10% decline I still don't feel Medibank offers a margin of safety at today's prices, even though it carries no debt and offers a reliable 3% dividend.
Primary Health Care Limited (ASX: PRY)
Burdened down by debt and general poor performance, my opposition to Primary Health also revolves around price and lack of a margin of safety. Recent comments by management also suggest poor culture as the company has had trouble recruiting doctors and has had to increase its spending on recruiting. A number of initiatives have been implemented to reduce the business's capital intensiveness and improve returns, but the trouble is that most of these already appear priced into Primary shares, which the market values at 21 times underlying profits.
If I had to pay a premium price for a private hospital operator I'd rather pick up Healthscope Ltd (ASX: HSO), which is functioning well, although as I noted yesterday I'm not keen on it at today's prices either.
Carsales.Com Ltd (ASX: CAR)
Carsales delivered another solid year of revenues and profit growth to the market this year, causing shares to rise 10%. However the company appears priced for much stronger performance at around 27 times earnings. Surprisingly, Carsales was sold off last year after a similar performance from a similar price level. Carsales has an attractive business and importantly appears to retain much of its competitive advantage in Australia, while the international businesses are evolving well. However, as Foolish analyst Mike King suggested in his coverage (link above), the international 'tail' has a long way to grow before it can start wagging the dog. I haven't sold a share, but I bought at around $10 and would find $13 per share a bit rich when there is a plethora of other opportunities out there.
I'm not saying you should avoid these companies forever, but when there's 300 companies in the S&P/ASX300 (INDEXASX: ^AXKO) (ASX: XKO) that should be approachable by most investors, there's no need to fixate on these three expensive ones.
