Shares in pathology and diagnostic imaging operator Primary Health Care Limited (ASX: PRY) have been absolutely crushed in recent times after a negative trading update back in November, followed by more recently announced cuts to pathology and imaging spending by the Federal Government.
As a result, Primary has lost more than 50% of its value in the past six months.
I recently wrote on Primary's prospects back at the start of October and concluded that the company still wasn't a buy as a result of high debt and uncertainty over earnings as a result of possible legislative and budgetary changes.
Since I wrote that article, shares have dropped more than 35% and now I believe that Primary has become cheap enough to represent a solid value purchase.
Considerable uncertainty remains over the company's earnings, dividend, and sizeable debts, especially since management hasn't yet quantified the potential impacts of the latest MYEFO spending cuts on its business.
This means that a purchase of the company today is only suitable for more risk-tolerant investors. As a result of the increased uncertainty, investors should also demand a higher margin of safety before buying. For me, the magic level would be around $2-$2.10 per share.
However, the trade-off between risk and reward now looks at lot more favourable, in my opinion. Primary shares appear quite undervalued, as well as substantially cheaper than competitors like Sonic Health Care Limited (ASX: SHL) and Capitol Health Ltd (ASX: CAJ). Additionally, Primary remains a defensive healthcare business that is likely to experience resilient demand over the next few decades, legislative changes or not.
For these reasons, Primary Health Care could be a good purchase for the right investor today.
