What would it take to get 'The Oracle of Omaha', Warren Buffett, running the ruler over Medibank Private Ltd (ASX: MPL)?
I've combined his 'rules for acquisitions' (contained in Berkshire Hathaway's annual reports) with his 'four principles' for investments which he also mentions semi-regularly in his reports. Just how does Medibank stack up against these criteria?
- Large purchases ✓
Medibank has a market cap of $6 billion, so I think it fits.
- Demonstrated consistent earning power ✓
Insurers' profits can be lumpy, but short-tail health insurance enjoys strong demand and is less likely to get caught out by unexpected disasters than QBE Insurance Group Ltd (ASX: QBE) and Insurance Australia Group Ltd (ASX: IAG). Buffett built his success on insurers, so I've given Medibank the benefit of the doubt.
- Businesses earning good returns on equity while employing little or no debt ✓
Based on its most recent annual report, Medibank had a respectable return on equity (Net Profit After Tax divided by Total Equity) of around 27%. It also has no debt. Tick.
- Management in place ✓
Publicly listed company so, tick. New CEO Craig Drummond and his team would be assessed by Berkshire before any investment was considered, however.
- Simple businesses ✓
Again, tick. Some of the policies can get complex but all of the information necessary to understand Medibank is available either from the company, the Australian Bureau of Statistics (ABS), or market intelligence companies like Nielsen.
- An offering price ✓
Publicly listed company, tick. A complete takeover for Medibank would command an unknown price however, probably significantly higher than today's.
- One that we can understand ✓
Insurance company, see #5. Tick.
- With favorable long-term prospects ✓
In addition to no debt and an attractive return on equity, Medibank enjoys tailwinds in the form of an ageing population and increasing demand for healthcare. What's more, it pays attractive dividends and benefits from regulated premium increases every year. Tick.
- Operated by honest and competent people
This one's a little difficult to evaluate. We might presume competence by the fact that Medibank staff were specifically hired for their positions, but without any specific evidence either way I'll mark this one a miss.
- Available at a sensible price
A 'sensible' price is the sticking point. Despite falling more than 15% since its most recent results, I'm not sure Medibank is standout value today. Its decline in customer numbers only accelerated in the past 6 months and with the company reinvesting in products and systems, it might not be able to achieve the same level of profitability that it has in recent times. Medibank appears cheaper than other insurers, but this might be deserved.
Foolish takeaway
With 8 out of 10 ticks, Medibank doesn't appear to be a Buffett-style investment. What's more, half of those ticks are due to its type of business and its status as a public company – neither of which are unique to Medibank.
Buffett has previously stated an affinity for buying businesses when they are 'on the operating table', so Medibank's competitive troubles are unlikely to faze him. However, he's also stated a preference for businesses with unique products and/or a moat, and Medibank appears to have neither – it sells health insurance, and competitors have been poaching its market share for the past year.
I don't think we can expect a Berkshire investment in Medibank in the near future.
