You won't find many stocks outside of the resources sector rallying today, but Victoria's largest non-hospital-based diagnostic imaging facilities operator managed to buck the trend as it surged to a three-week high this afternoon.
Shares in Capitol Health Ltd (ASX: CAJ) climbed 7.6% to 77.5 cents after management painted an upbeat outlook as it reported a 59% uplift in underlying profit before tax to $16.2 million as revenue escalated 23% to $111.2 million for the year ended June 30, 2015.
The company's margins are also expanding to reflect its operating leverage with pre-tax profit margin jumping an impressive 325 basis points (3.32 of a percentage point) to 14.5%, although statutory net profit tumbled 46% to $3.9 million due to acquisition and restructuring costs.
The profit result had essentially been pre-announced in the company's update at the end of July but the very pleasing 48% surge in underlying earnings per share (EPS) to 2.49 cents for 2014-15 is significantly ahead of consensus expectations of 2.27 cents that's reported on Reuters.
It's important for acquisitive companies like Capital Health to deliver EPS growth ahead of revenue growth because it is one of the ways investors can see that the company is making acquisitions that are value adding to shareholders.
This wasn't the case for roll-up business G8 Education Ltd (ASX:GEM) when it handed in its earnings report card yesterday and that's one of the reasons why the share price slipped backwards even though the childcare centre operator reported a 73% increase in net profit to $28.2 million.
Capital Health upped its full year dividend by 39% to 1.25 cents a share and said its earnings growth is driven by market share increases, improvements in costs and efficiencies and the scalability of its business model.
There's more room to grow as Capital Health only has around 5% of the market and the group is still on the prowl for acquisitions after completing no less than four transactions since February this year.
While management has not given guidance for the current financial year, it said its strong performance is "expected to be maintained" in 2015-16.
That could be an understatement as analysts are tipping a 40% increase in EPS for 2015-16 on the back of recent acquisitions.
But is the stock still worth buying given that it is trading on a price-earnings multiple of 24x for the current financial year? I think the stock is trading reasonably close to fair value and there might be some upside to its current price.
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