Valuation metrics such as the Price to Earnings (P/E) ratio, dividend yield and share price on their own aren't enough to be grounds for a good investment.
However, they are the first thing any investor sees when they're trawling through the ASX, and when combined with an attractive long term business – in this instance, healthcare – it's enough to spark their interest.
After a disappointing annual report, Primary Health Care Limited (ASX: PRY) shares crashed and now trade on a Price to Earnings (P/E) ratio of approximately 13, paying a 5.5% partly franked dividend at today's prices.
While the company looks very appealing compared to similar stocks like Ramsay Health Care Limited (ASX: RHC) and Sonic Healthcare Limited (ASX: SHL) which have P/Es of 31 and 21 respectively, I do not feel that Primary is a buy just yet.
What I like:
- Broad mix of businesses including imaging, pathology, medical centres (doctors and specialists) and health technology
- Diversifying and growing with new businesses such as IVF (In-Vitro Fertilisation) and a medical property fund (to acquire locations for expansion)
- Revenue-focussed, moderate long-term tailwinds in the form of an ageing population and increasing levels of health insurance and medical care
- International expansion for the pathology business
What I don't like:
- High debt (over $1 billion), low cash at bank ($50m) and negative free cash flow (which means the company required additional debt to fund its spending last year)
- No apparent intention to control its debt as the company took on another $300m debt last year – this means that if future acquisitions don't perform as expected the business and dividends could suffer
- Productivity Commission review into health care spending has potential to impact pathology and imaging segments (the biggest earning segments)
- Much of the business is funded by Medicare and health insurance which creates funding risks – especially in light of the above point, government changes to health care spending, and strong-arm tactics of insurers like Medibank Private Ltd (ASX: MPL)
So while Primary Health Care might look attractive at first glance, taking a deeper look at the company has been sufficient to turn me off for the time being.
In order to consider making a purchase, I would have to see some sort of resolution to at least two of the points on the negative side of the ledger as well as additional signs of improving growth in the future.
