The Paragon Care Ltd (ASX: PGC) share price has fallen by about 10% since the start of 2018, but over the past five years has grown by 152%.
Paragon is a small cap healthcare business that supplies medical products and equipment like beds to hospitals, aged care facilities and other healthcare locations.
I believe there are several reasons to like Paragon, here are a few of them:
Acquisition expansion
Paragon's key strategy is to expand the business through acquisitions. A simple roll-up strategy can work out okay, but I think Paragon's strategy is quite effective.
It is steadily acquiring businesses that supply different healthcare products with different sets of customers. This means that over time, as Paragon makes more bolt-on acquisitions, it can offer its clients more of their purchasing needs and the new acquisitions may provide Paragon with another set of clients.
For example, Paragon recently acquired Surgical Specialties Group for $32.4 million. This acquisition is expected to be earnings per share (EPS) accretive in FY18, whilst adding $30 million of annual revenue and $4.9 million of earnings before interest, tax, depreciation and amortisation (EBITDA).
Customers
Paragon supplies a variety of different healthcare markets including aged care, hospital & acute care, primary care, eye care, storage solutions, service & technology management, e-health and diagnostics.
According to the company, before its recent acquisitions, 80% of Paragon's revenue came from hospitals and 80% of that came from the public system whilst the other 20% came from the private sector.
With Australia's clear ageing demographics it's obvious the growth in total healthcare expenditure will continue to grow and Paragon could benefit from this if it becomes a major supplier for the public sector.
Underlying growth and dividend
It's hard to get a gauge on the true performance on the business at the moment due to all of the acquisitions, so FY18's figures could be quite messy. However, according to Paragon's figures the company is expecting revenue (before acquisitions) to be between $125 million to $135 million in FY18 compared to $117.2 million in FY17.
Earnings before interest, tax, depreciation and amortisation (EBITDA) (before acquisitions) is expected to come in at between $18 million to $19 million in FY17, compared to $17.1 million in FY17.
Most importantly, the company expected that earnings per share (EPS) before acquisitions would have been 6.4 cents per share, which would have been 3.2% growth.
If the company can continue to deliver EPS growth whilst maintaining a reasonably conservative balance sheet then Paragon could do well.
I also like that it has grown its dividend each year since it started paying a dividend in 2013. In March 2014 it paid a dividend of $0.005 per share, last month it paid a dividend of $0.011 per share – more than doubling its half-year dividend.
Valuation
Paragon is trading at trading at 11x FY18's underlying earnings, if we take the 6.4 cents EPS figure as a true reflection of what the earnings may have been without the acquisitions.
In anyone's book, a price/earnings ratio of 11 is low and is cheap. If Paragon's p/e ratio increases to just 13 and it achieves reasonable EPS growth then it could create good returns for shareholders.
Foolish takeaway
However, there are risks too. The acquisition strategy can be problematic if the company takes on too much debt or if one or more of the acquisitions don't work out.
Healthcare costs have also come under public scrutiny in recent times, so Paragon will have to work hard to offer the best value, whilst also increasing profit margins over time.
At the current price I believe Paragon could be a good long-term option for investors wanting to buy a small parcel of Paragon.
