One healthcare company to watch

With advances in medical technologies and an aging population, healthcare is a good market to find successful investments.  Healthcare stocks that have outperformed the general market are usually focused on a particular technology.

Capitol Health (ASX: CAJ) is an Australian public company providing medical diagnostic imaging (DI) services. It is the only ASX-listed company operating exclusively in DI. The company’s objective is to build a leading primary healthcare business generating sustainable growth and profitability for shareholders and deliver superior patient experiences at its centres.

As noted at its Annual General Meeting for 2013, Capitol Health estimates the DI market to be $3 billion next year and growing by 5% for the next 10 years. Key drivers of growth, as stated in the report, are an expanding and aging population; shifting focus to early detection and prevention; improved accuracy and capabilities of imaging techniques; and government incentives. With sales in the last financial year of $61.6 million, Capitol Health has 2% share in the Australian DI market, leaving considerable room for expansion..

Since commencing operations in June 2006, Capitol Health has grown to become Victoria’s second largest source of DI services. Capitol Health covers a broad range of services, including general x-ray, ultrasound, mammography, magnetic resonance imaging and others.

Capital Health provides DI services via 51 clinics throughout metropolitan and rural Victoria. The company conducts 700,000 procedures annually and employs 450 people. Capitol Health is focused on the profitable expansion of its business both by organic growth and acquisition. The company recently completed purchase of MDI Radiology, which cemented its position as a leading provider of DI services in Victoria.

Recent legislation has significantly strengthened the demand for DI services. On the first of November this year, the federal government brought into effect provision of Medicare rebates for certain services, including DI for doctors’ patients.

Sales have continually increased from 12 cents year ending 2010 to 16 cents year ending 2013. Likewise, return on equity for the same period has grown from 3.7% to 10.6%. These trends are very encouraging, as they are consistently upwards. Also, debt to equity is 35.9%, and is more than adequately covered 15.55 times. Cash flow has been positive since 2008 and the company has paid a modest dividend this year and last.

Foolish takeaway

Although there has been substantial consolidation in the Australian radiology industry, Capitol Health believes there is considerable opportunity for expansion in the industry by acquiring and establishing new clinics that deliver bulk-billed services.

Capitol Health enjoys a unique position with a highly focused strategy leading to consistently strong profitability and growth. In addition there is a supportive regularity environment. I believe Capitol Health is one to consider for the long term.

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Motley Fool contributor Chris Koenig owns shares in Capitol Health.

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