Medical centre operator Primary Health Care Limited (ASX: PRY) has been hit hard by a profit downgrade but the drop in its share price might seem exaggerated to some given that the earnings revision seems minor.
Primary Health Care took its worst spill in nearly four years as it tumbled as much as 11% to $4.61 in early trade when management revealed that underlying 2014-15 earnings before interest, tax, depreciation and amortisation (EBITDA) will be around 4% below consensus at $400 million.
Primary Health Care has the dubious honour of being the worst performer on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) this morning.
However, it's not so much the magnitude of the profit downgrade but the fact that Primary Health Care actually had one that's spooking investors.
After all, this is supposed to be a defensive stock with reliable earnings, and that's why you'd be happy to pay close to a 20x forecast price-earnings (P/E) multiple for Primary Health Care.
The realisation that its business may not be as bullet proof as one might have thought has triggered today's painful de-rating in the stock with management blaming "subdued patient volumes" in the June quarter for the weak outcome.
Extreme weather and a mild cold and flu season compared with the same time last year are keeping patients away from its doctors and a higher tax rate will see a 5% drop in earnings per share (EPS) for 2015-16, compared with management's initial forecast of a 5% to 12% increase.
What's more, a big reduction in the company's tax refund will also weigh on its statutory net profit. Primary Health Care was expecting a refund of $155 million from the Australian Tax Office (ATO), but it has decided to offset its doctors' tax liabilities to a tune of $105 million, which will be deducted from the refund.
This decision was made in negotiations with the ATO, which had wanted to tax doctors' practice sales proceeds as ordinary income. This is a positive outcome as it has been a sticking point between clinicians and the company.
But the bigger question facing investors is whether Primary Health Care is smelling like a bargain after its big de-rating?
The stock is on a P/E of around 15x post the downgrade but the issue is what analysts will do to their 2015-16 forecasts.
Currently, consensus is tipping an 8% increase in EPS for the current financial year over 2014-15. I suspect this will come down to under 5%.
So while Primary Health Care may not look expensive after the big sell-off, I don't think there is enough value in the stock at current prices to attract bargain hunters given its clouded outlook.
The stock will need to fall under $4 to get me excited and I think investors are better off buying Motley Fool's top dividend stock for 2015-16.
Sign up for free below to see what it is.
