After a shocking set of interim results were released two weeks ago, Lifehealthcare shares fell off a cliff, losing 45% of their value in the past month to a low of $1.28.

Shares subsequently recovered by soaring 15% on Friday to $1.52 as some investors took advantage of the low prices to top up their holding – but is the company really good value, or could things deteriorate further?

(For full disclosure, I had a buy order in at $1.28 – which I’ve now cancelled – but missed out on shares by a whisker)

The ‘Buy’ case

  • Defensive healthcare demand is a ‘macro’ tailwind for the company, supported by a robust health insurance system
  • Room to grow through acquisition in a fragmented market
  • Each acquisition expands the company’s footprint and allows cross-selling as well as expansion into adjacent segments

The ‘Sell’ case

  • Funding situation is unattractive with poor cash flow and rising debt, as well as potentially paying a (reduced) dividend through debt
  • Potential for government review into healthcare to impact prosthetic pricing, which would hurt a major source of high-margin sales
  • Blowout in operating costs including working capital suggests business is not particularly scalable

If we double Lifehealthcare’s recent Net Profit After Tax to approximate full-year earnings, this suggests shares are decent value at today’s levels, trading on a Price to Earnings (P/E) ratio of around 10, substantially below the market average.

At least, it looks as though the potential for a hit to profitability from changes to the healthcare system is already priced into the company. Management has implied they do not believe Lifehealthcare’s prosthetics business is at risk from this review, as a result of media reports that have ‘misrepresented implant price inflation and overestimated public / private price variation‘.

Lifehealthcare is small, and even at share prices of $3 apiece the company has a market cap of only ~$130 million. This means that additional expenses like the recent $1.1m in acquisition costs can have a big impact on profitability. Looking through the results to future periods, shareholders might expect Lifehealthcare profits to experience a rebound as these one-off expenses work their way through the business.

Shareholders might also take some heart from management’s statement that $3.8m of the $8.7m increase in working capital costs was to ‘support stronger second half pipeline‘. A further $1.1m came from higher receivables from the recent MVA acquisition.

Interestingly, similar business Paragon Care Ltd. (ASX: PGC) also reported poorer cash flow during the half, which it attributed to timing differences and an increase in inventory expenses, just like Lifehealthcare. This could indicate a wider industry trend rather than poor performance at Lifehealthcare.

Nearly all businesses promise improvement after a disappointing set of results, but it currently appears that much of the downside is already priced into Lifehealthcare shares. Based on the known facts and management statements, Lifehealthcare could be set to see improving business performance over the next 12 months or so, and I am looking to top up my holding, when Foolish trading rules permit.

Looking for another winning investment idea?

Our resident dividend expert has just named his Top Dividend Stock for 2016. Not only are the shares dirt cheap, the company is trading on a 5.6% fully franked dividend yield. Simply click on the link and enter your email address to gain access to this comprehensive FREE investment report - no credit card details or payment required!

Yep, it's free, and includes the stock's name and code. Just click here now for your copy.

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool contributor Sean O'Neill owns shares of LifeHealthcare Group Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.