PRICE CRASH: Are Sonic Healthcare Limited, Primary Health Care Limited and Capitol Health Ltd shares a good buy?

Three of the ASX’s leading healthcare companies have been sold off this week after the Federal Government released its Mid-Year Economic and Fiscal Outlook (MYEFO).

The MYEFO threw into doubt future Medicare support payments for the pathology and medical diagnostic imaging sectors.

The proposed changes include the removal of bulk billing incentives for pathology services, the removal of bulk billing incentives for x-rays with the exceptions of concessional patients and a reduction in the bulk billing incentive paid to providers for MRI scans.

The government’s announcement which is set to save hundreds of millions of dollars in payments is expected to negatively affect three of Australia’s largest providers namely, Sonic Healthcare Limited (ASX: SHL), Primary Health Care Limited (ASX: PRY) and Capitol Health Ltd (ASX: CAJ).

Inclusive of this week’s falls, the share prices of Sonic, Primary and Capitol are now down around 8%, 43% and 63% respectively in the past three months alone.

The share price performance is even more dire when viewed over a six-month time frame with their share prices falling 16%, 55% and 72% respectively.

Those are very significant declines and potentially they could have created a meaningful gap between price and value, however, not surprisingly it isn’t clear cut…

An announcement provided to the market by Capitol Health in response to the government’s MYEFO stated the following –

“based on certain assumptions surrounding the implementation of the changes including the potential composition of the patient profile (age or concession holders as a percentage of total patients) in July 2016 and onwards, potential impact of remedial actions implemented by the Group and other matters, the Company estimates a potential impact of revenue of approximately five to seven percent is possible.”

That’s hardly what one would describe as a dire hit to revenue but it’s certainly a drag on profits considering the high fixed cost nature of these types of businesses and raises the complexities with accurately forecasting the future profitability of these three firms.

Utilising consensus forecast numbers so soon after a change in the outlook for an industry is risky too.

Based on historic financial year 2015 earnings however, Sonic, Primary and Capital are now trading on price-to-earnings ratios of 20.1x, 10.2x and 10x respectively.

For investors looking for a higher quality business with global growth options then any weakness in Sonic’s share price caused by its exposure to the Australian regulatory environment may become a buying opportunity.

Meanwhile, further analysis of the long term earnings potential for Primary and Capitol will help identify whether a value opportunity is currently presenting itself in these two stocks.