Diagnostic healthcare is an inherently defensive industry; demand for diagnostic services generally does not fluctuate with economic cycles because of its connection to human well being. Capitol Health Ltd (ASX: CAJ) operates in this space and is one company which I believe is poised to flourish.
The industry
The diagnostic imaging industry is a tightly held oligopoly controlled by a few big players. In 2014, IBISworld reported total revenue for healthcare imaging in Australia surpassed $3.3 billion per annum, with annual compound growth of 5.5% from 2010 to 2015. By 2020, revenue is set to reach $4.1 billion annually, creating a large pie for imaging operators to profit from.
ASX-listed stocks currently operating in this area include Healthscope Ltd (ASX: HSO), Sonic Healthcare Limited (ASX: SHL) and Primary Health Care Limited (ASX: PRY) with the latter two commanding a combined 25% market share in the industry.
The heavy concentration has left the industry ripe for disruption, with Australia's ageing population set to test capacity of current providers and increase competition as new entrants can afford to enter the market. With people aged over 65 to account for an increasing percentage of the population by 2020, it is expected that growth in the medical imaging industry will come from demand for preventative and diagnostic procedures.
Capitol Health services the latter segment, providing the company with favourable tailwinds which makes it, in my opinion, a growth stock to buy today.
The company
Capitol Health is a diagnostic imaging provider, specialising in X-Ray imaging. It provides X-Ray and internal imaging services to hospitals and clinics in regional Victoria, enabling doctors to diagnose their patients' ailments.
With a market capitalisation of $269 million, Capitol Health punches well above its weight with underlying net profit of $16.1 million on the back of $111.2 million in annual revenues last year.
Importantly for a micro-cap stock, Capitol Health has solid fundamentals generating $15.6 million in operating cash and paying an annual dividend of 1.25 cents in the 2015 financial year.
Capitol Health recently announced growth plans to open new clinics in New South Wales, indicating the company is on the verge of domestic expansion and set to challenge market incumbents.
Capitol Health has a 2.3% market share in the diagnostic imaging industry and grew revenues by an average 25.1% over the last five years, similar performance over the next five years would make it a bargain at current prices.
The downside
The key risk for Capitol Health (and the broader medical industry) is changes to the Medicare scheme. As most of the company's profits are funded via bulk-billing services, any alteration to the scheme would stifle Capitol Health's growth trajectory.
At the present time, these risks appear to have dissipated with the current government announcing no immediate changes will occur to the Medicare scheme. However, nothing can be guaranteed in politics.
Foolish takeaway
Despite the political risks, the prospects for the industry remain favourable, with Capitol Health being poised to deliver market beating performance if it executes to plan. This makes it, in my opinion, one stock to add to your portfolio today.
