Primary Health Care (ASX: PRY) released its 2014 first-half results last Wednesday, and whilst the headline figures were all up (including earnings per share and its interim dividend), the share price has fallen 5.6% to $4.65 per share.
Primary Health Care's overall half-yearly earnings numbers were up on the prior corresponding period with net profit after tax and earnings per share both up by more than 8%, and its interim dividend up a hefty 38%.
The seemingly positive result was overshadowed by concerns surrounding its Medical Centres segment, the performance of which was impacted by lower dental revenues from the abolition of the Federal government's chronic dental disease scheme funding. This fed through to the bottom line with earnings numbers coming in at the lower end of the company's forecast for 2014 (7% to 13% growth in earnings per share).
Although dental comprised 9% of the Medical Centre segment's revenue, it amounts to less than 3% of the company's total revenue. On the upside, the new Child Dental Benefits Schedule could provide a slight increase to dental revenues, although it won't make up for the amount lost due to the chronic dental disease scheme closure. There is also the possibility that this area will be scrutinised in the near future by the current government, given its criticism of the chronic dental scheme's closure and its election commitment to "improve and restore dental services through Medicare".
Are Primary Health Care shares cheap?
Primary Health Care is currently trading on a price-to-earnings ratio (PE ratio) of 14.73 times, with its share price having come down 9.5% in the last six months. The question here is whether this represents good value or could be a dreaded falling knife scenario. The company recently reconfirmed its forecasted earnings per share growth in 2014 of between 7% and 13%, which would give it a mid-point forward PE ratio of 14.14 times and a forward dividend yield of over 4.0%, assuming that the company hits its forecasted numbers and retains the current dividend pay-out ratio of 58.5% (the interim dividend of 9 cents per share represents a 60% dividend pay-out ratio).
At first glance, Primary Health Care's PE ratio compares favourably to its competitors Ramsay Health Care (ASX: RHC) at 28.64 times, and Sonic Health Care (ASX: SHL) at 18.15 times. However, this is not necessarily reflective of good value, with some commentary indicating that all three are expensive at their current prices (see here and here). On a dividend yield basis, both Primary Health Care and Sonic look good at 3.7% whilst Ramsay is well under at 1.7%.
I prefer Primary Health Care given its domestic focus, organic growth agenda (complemented by small bolt on acquisitions) and upside potential in its Health Technology division (although this currently only makes up 5% of its earnings). Additionally despite concerns around its revenues and earnings slowing down, Primary Health Care has reconfirmed its outlook for the 2014 financial year, backed by a solid first-half result.
In contrast to Primary Health Care, Sonic and Ramsay both benefit from having international operations that geographically diversify their respective business models whilst also providing a natural hedge to a potential depreciation in the Australian dollar.
Whilst this may seem to be a positive risk mitigating strategy at first blush, it can also present other risks. Having international operations exposes these companies to other potential issues such as those currently being experienced in the United States (where some of Sonic's competitors have flagged a negative outlook in the U.S. lab services market), or continued weakness in the UK and French economies (which could affect Ramsay).
Foolish takeaway
Although there have been some recent rumblings around Australia's unemployment rate and an increasingly shaky economy, people will continue to get sick and old, see doctors, get blood tests and have scans performed. The health care sector may not be immune to a cyclical downturn, but at the very least, there will remain a core demand for their services.
Readers may wish to consider Primary Health Care over the long term, given its current dividend yield of just under 4%, forecast earnings per share growth of at least 7%, comparatively low PE ratio, a positive first-half result for the 2014 financial year, its diversified business model and long-term growth potential for the Australian health care sector. Live long and prosper indeed.
