Should you buy Primary Health Care?

Primary Health Care’s (ASX: PRY) Annual General Meeting was only the day after that of 1300Smiles’ (ASX: ONT). However, that didn’t prevent Managing Director of Primary Health Care Edmund Bateman directly contradicting his counterpart at 1300Smiles, in declaring that dental revenues were not resilient in tough or uncertain times.

However, other revenues countered the dental declines and the company remains on track to meet previous guidance of earnings-per-share (EPS) growth of 7% to 13% for the 2013-14 financial year, thanks to the diversified business model.

This diversification is evident when one considers it is a service company to medical and allied health professionals offering a range of medical and related services in its network of medical centres and pathology centres across Australia. It is also a provider of healthcare technology solutions to medical practitioners, medical practices and hospitals.

It has considerable capacity to continue to acquire practices and services into the current 58 large-scale medical centre infrastructure. Additionally, it has more than 1,500 Licensed Pathology Collection Centres throughout Australia and more than 150 Diagnostic Imaging practices.

Primary Health Care may best be compared to pathology competitor Sonic Healthcare (ASX: SHL). However, it also belongs to the roll-up (aggregators) genre of healthcare companies which includes 1300Smiles and veterinary services company Greencross (ASX: GXL) as well as the insurance company Austbrokers (ASX: AUB). Comparisons across direct competitors and the more general aggregators are valid to assist investors in making informed choices.

In a prior article on roll-ups, I maintained a strong preference for Greencross due to its diversification, cross-selling opportunities and potential synergies derived from a yet-to-be approved merger.

In a competitor comparison, Sonic Healthcare trumps Primary Health Care for two main reasons. Firstly, the reporting season revealed upgrades from brokers, due to a US$60 million cost-cutting program in the US, above consensus pathology margins and strong medical centre margins. Upgrades tend to be like bats in the attic, there are often more than one. Secondly, it is an international (49% overseas revenue) medical diagnostics company, offering laboratory medicine, pathology and radiology services to the medical community. This geographical diversification dilutes its risk profile.

Foolish takeaway

It’s hard to fault Primary Health Care as it met prior guidance, however all investments are relative. On a roll-up comparison, Greencross outshines Primary Health Care, while in the direct competitor space, Sonic Healthcare is my preferred choice. Both Greencross and Sonic Healthcare are very worthy of inclusion in any defensive allocation, within a medium- to long-term portfolio.


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Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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