Which stock posted an 11-fold surge in profit and is a screaming buy?

Not many would have noticed this tiny cap healthcare stock even after it delivered a stunning half year result and reaffirmed its strong full year sales and earnings growth.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There's a microcap stock that's just posted an 11-fold increase in net profit that is still under the radar of most investors.

I am not talking about a speculative drug or technology developer. I am referring to hospital equipment supplier Paragon Care Ltd. (ASX: PGC).

There's plenty to like about Paragon Care's result although you couldn't tell from today's market reaction with the stock sinking 2%, or 1 cent, to 46 cents.

I am not surprised at the weak market reaction even as investors sent shares in Ramsay Health Care Limited (ASX: RHC) and Japara Healthcare Ltd (ASX: JHC) surging higher today on the back of pleasing results.

Ramsay delivered a 21.3% increase in net profit and Japara posted a 13.8% lift in revenue.

Sure, Paragon's profit is coming off a low base of $70,000 in the first half of 2013-14, so the 1,044% surge to $840,000 in the six months to end December last year may not impress some, particularly given the tax benefit received.

However, make no mistake there is strong underlying growth in the business as earnings before interest, tax depreciation and amortisation (EBITDA) jumped four-fold to $1.6 million.

First half sales are up 65% to $13.5 million and management upped its fully franked interim dividend by 20% to 0.6 cents a share.

I am expecting the strong growth momentum to continue due to organic growth and acquisitions.

What's more the second half should see even an even stronger performance with management forecasting full year revenue of between $30 million and $33 million and EBITDA of $3.5 million to $4 million.

This compares to Paragon's 2013-14 revenue of $19.4 million and EBITDA of $1.8 million.

As to why you shouldn't be taken aback from today's lacklustre market reaction to Paragon Care, the stock has run up 42% over the past year and I am expecting it to take a breather before heading higher.

Is the stock looking fully valued after the big run? Paragon Care is trading on an estimated 2014-15 price earnings (P/E) multiple of around 15-16x when the healthcare sector is on a P/E well in excess of 20x.

The discount to the sector will likely widen given the growth projection for Paragon Care and investors are paid to wait as the stock is on a trailing yield of about 4.1% once franking credits are included.

Use any dip in Paragon Care's share price as a buying opportunity. This stock is heading higher.

Motley Fool contributor Brendon Lau owns shares in Paragon Care, Ramsay Healthcare and Japara. Follow me on Twitter (https://twitter.com/brenlau)

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »