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If you missed Lifehealthcare Group Ltd’s 30% surge here’s another stock to watch

Medical equipment supplier Lifehealthcare Group Ltd (ASX: LHC) jumped a further 7.3% in lunch time trade to hit $2.64 – its highest since the stock debuted a little over a year ago.

A company update pointing to better-than-expected half year results on Monday has driven the stock nearly 30% higher and experts think there is still room for the implantable device and capital equipment supplier to run higher.

UBS has upped its price target on the stock to $3.40 and reiterated its “buy” call after management said first half net profit will hit $3.4 million, 19.5% above its prospectus forecast, while Motley Fool’s Mike King highlighted its compelling valuation at its initial public offer and continues to call the stock cheap.

Feel like you are late to the party? There’s another small cap stock in the sector that’s set to deliver a big jump in earnings for 2014-15. I am talking about Paragon Care Ltd. (ASX: PGC).

The hospital equipment supplier is forecasting revenue of $30 million to $33 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of between $3.5 million and $4 million for the current financial year.

In contrast, Paragon Care posted sales of $19.4 million and EBITDA of $1.8 million in 2013-14.

PGC

Much of the tailwinds from favorable demographic and industry trends that are bolstering Lifehealthcare’s business are also giving Paragon Care a leg-up, but the latter is capitalising on its strong balance sheet and the low cost of capital to make meaningful acquisitions.

What’s more, Paragon Care has a successful track record of bedding down acquisitions as it has made at least eight takeovers in the last six years. The hospital equipment sector remains fragmented and I won’t be surprised to see management make further earnings accretive bids in 2015.

Paragon Care’s share price may be trading on a high with the stock gaining a third in value since the start of the calendar year, but Paragon Care is still priced at a meaningful discount to Lifehealthcare.

Based on the latest guidance from both companies, Paragon Care is on a 2014-15 P/E of around 10 times (assuming similar depreciation and amortisation and interest rate payment schedules to last year), while Lifehealthcare is on a 13 times multiple.

The broader sector trades on an average P/E  17 times.

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Motley Fool contributor Brendon Lau owns shares in Paragon Care.

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