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G8 Education expects to beat consensus earnings

Childcare centre owner and manager G8 Education (ASX: GEM) on Friday last week released guidance to the market that it expects to exceed the average earnings before interest and tax (EBIT) forecast by the four brokers that cover the stock “by less than 5%” for the financial year (FY) ending 31 December 2013.

The brokers have an average forecast for revenue of $277 million and EBIT of $49.8 million. While the guidance might not appear significant at “less than 5%”, it is still a positive for shareholders that the company is beating rather than missing forecasts. Perhaps even more important than the results expected for FY 2013 is the consensus forecast for FY 2014, where the average of the four brokers’ guidance suggests revenue at G8 will rise to $385 million and EBIT will leap to $73.3 million.

G8 is one of a handful of recently listed ‘consolidators’ that have produced enormous share price gains for shareholders in the past two years. While G8 is busy consolidating the childcare market, Greencross (ASX: GXL) has been energetically buying up veterinary businesses and just last week announced a planned merger with the parent company of pet care retail chain Petbarn. Meanwhile, within the healthcare sector  — an industry that regularly attracts consolidators — Capitol Health (ASX: CAJ) continues to acquire and expand its portfolio of diagnostic imaging clinics.

In the past two years, G8’s share price has risen 405%, Greencross’ is up 420% and Capitol Health’s shares have surged 1369%! All this during a period in which the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has increased by 29%.

Foolish takeaway

Discovering a ‘consolidator’ during the early stages of an industry consolidation phase as the returns above show can lead to significant gains for shareholders. However, investors need to judge each ‘consolidator’ on an individual basis and pay particularly close attention to how the business is being funded.

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Motley Fool contributor Tim McArthur does not own shares in the companies mentioned.

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