I'm not a fan of Medibank Private Ltd (ASX: MPL). I think it's more expensive than it should be, given the situation the company is in and the likely profit growth that it will generate in the next couple of years.
These two key issues are the reason I think Medibank is one to avoid for now:
- Competition
Medibank has been losing market share to private competitors like Bupa for many years. While management is aware of the issue, they haven't been able to reverse it, although the recently appointed CEO Craig Thompson brought in some new ideas on this front. In order to recover market share, Medibank will be investing heavily in staff, technology, and policy value (see below) which will result in lower profit margins.
If we assume that Bupa has a superior offering (and they probably do if taking market share), Medibank will be reducing its profitability as well as attempting to overcome a possibly superior competitor. It seems like the right business decision, but it's not the kind of investment that shareholders should be paying big $ to get themselves into.
- Restructure
Recently, Medibank alone accounted for more than 50% of all industry complaints to the Private Health Insurance Ombudsman (PHIO), despite having approximately only a 26% market share. As a result, the company announced major plans both to increase policy value (the 'things' that policyholders receive/can claim for) and to greatly increase call centre staff operating numbers, level of training, and opening hours.
Greater value for policyholders could squeeze the profit margins on each policy the company writes, as will higher costs. Investors are counting on the company's claims control procedures to reduce claim costs enough to compensate for this, but the outcome of this is uncertain in my opinion. The business itself stands a good chance to become less valuable, or at least to stagnate in the foreseeable future.
