When it comes to investing in the health care sector there are a handful of companies which enjoy 'market darling' status. Amongst this select group of top tier companies are Ramsay Health Care Limited (ASX: RHC), Sonic Healthcare Limited (ASX: SHL) and Healthscope Ltd (ASX: HSO).
There is little argument that these businesses own some appealing assets. The problem for investors is that these stocks trade at price levels which leave little room for anything but perfection.
Enter Primary Health Care Limited (ASX: PRY).
Primary is the smallest of the companies mentioned here with a market capitalisation of 'just' $2.8 billion. However, from a price point of view, it is arguably the most appealing…
The group operates across four divisions, namely: medical centres, pathology, imaging and health technology, with the medical centre and pathology businesses contributing the majority of profits to the group.
In financial year (FY) 2014, the group reported a 5.8% gain in revenues to $1.52 billion, an 8.3% jump in net profit after tax to $162.5 million, a 7.7% increase in earnings per share (EPS) to 32.2 cents per share (cps) and a 14.3% increase in its dividend to 20 cps.
This growth has continued into the first half of FY 2015 with Primary reporting both top line and bottom line growth.
So far, so good, but…
One of the issues investors face when analysing a company is to determine the "real" level of earnings of a business. For example many analysts have been making there own adjustments to Primary's reported earnings over the years and arguably the market has already priced in the following accounting change. At the recent interim results, Primary included a change in accounting policy to a more conservative treatment of how the acquisition of healthcare practices is dealt with.
Importantly, based on the new policy the restated EPS for FY 2014 are 22.7 cps which is a long way short of the previously reported 32.2 cps.
Management reaffirmed that it was on track to meet its guidance for EPS growth of between 5% and 12% for the full year which at the mid-point suggest FY 2015 EPS of 24.6 cps.
With the stock trading at $5.28, this implies a price-to-earnings multiple of 21.5x.
