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Is it time to buy Lifehealthcare Group Ltd?

Lifehealthcare Group Ltd (ASX: LHC) was a late bloomer.

After an average IPO – which at the time stood out because of just how ordinary it was – shares in this healthcare equipment provider have shot up 52% since launch, and 54% in the last three months alone.

After a long period of tracking close to its launch price, it seems the company’s February half-year report has forced a rapid revaluation, which is great news for shareholders like me who bought in last year.

Here’s a recap of some of the highlights:

  • Profit after tax rose 19.5% due to greater sales of high-margin implantable devices
  • Revenue rose 15% compared to the prior reportable period
  • Introduction of new equipment broadened the company’s offering, while improved penetration of existing products also contributed to growth
  • Shareholders will receive a 7.5 cents per share (~2.3%), 76% franked dividend in March
  • Management provided guidance for full-year revenue growth in the low-double digit range

(You can read contributor Tim McArthur’s full coverage of Lifehealthcare’s interim results here)

With these figures in mind, let’s look at some metrics.

Lifehealthcare currently trades on a Price to Earnings (P/E) ratio of around 17, which is slightly higher than the ASX average.

However, that’s really quite a small premium for double-digit revenue growth.

Paragon Care Ltd. (ASX: PGC) uses a similar model to Lifehealthcare, and is enjoying even more rapid growth with first half sales leaping 65% (albeit from a small base).

Paragon also uses a more aggressive expansion model and trades on a P/E of 19.

(Contributor Brendon Lau rates Paragon a ‘screaming buy’ and expects growth to continue into the foreseeable future)

To put the situation in contrast, Wesfarmers Ltd (ASX: WES) has a P/E of 22 as a result of its popularity and defensive characteristics, despite offering much slower growth than Lifehealthcare.

Should product penetration continue to improve over the coming few years as new products are introduced and new surgeons begin using LHC’s products, shareholders could be up for a few good years, with the added advantage of long-term tailwinds for the healthcare sector.

However it is important to remember that Lifehealthcare and Paragon are essentially sales companies, and thus have less direct exposure to the sector compared to companies like Ramsay Health Care Limited (ASX: RHC) – which incidentally has a P/E of 39.

If you build it, they will come, whereas Lifehealthcare must maintain positive relationships with its surgeons (customers) as well as offering a capable product for reasonable value in order to fend off competition.

At current prices, Lifehealthcare sits somewhere between ‘fairly valued’ and ‘slightly cheap’, and could prove to be a real bargain if growth continues at current levels.

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Motley Fool contributor Sean O'Neill owns shares in Lifehealthcare Group Ltd.

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