Why the share price of Primary Health Care Limited plunged 12% today

Credit: Anoto AB

What: Before the ASX opened on Friday morning, general medical practice, pathology and diagnostic imaging operator Primary Health Care Limited (ASX: PRY) released a “Trading Update” to the market.

So What: The update states that the company now expects underlying earnings before interest, tax, depreciation and amortisation (EBITDA) and underlying net profit after tax (NPAT) for financial year (FY) 2016 to be approximately 5% below the FY 2015 result.

Explaining the cause of the downgrade, Primary pointed to margin compression due to three reasons:

  1. A freeze on indexation of Medicare rebates leading to flat revenue growth for the group’s medical centres.
  2. Lower-than-expected revenue growth in the pathology division partially due to the impact of fee cuts to Vitamin D and other tests.
  3. Regulatory uncertainty is believed to have had an impact on referral volumes which has led to subdued revenue growth in the diagnostic imaging division.

Now What: Investors have reacted negatively to Primary’s announcement, sending the share price down around 12% in early trade. The reaction is vastly different to the enthusiasm that investors showed for peer Sonic Healthcare Limited (ASX: SHL) yesterday when they sent Sonic’s share price up 7.7%.

Despite today’s share price action, investors will be better served by focussing on the intrinsic value of Primary’s businesses. The group is undertaking strategic initiatives to improve performance including the establishment on the Primary Health Property Trust.

With the stock trading on a revised price-to-earnings ratio of roughly 12.5x the current year earnings forecasts (post downgrade), long-term investors could arguably view today’s sell-off as an opportunity to acquire a defensive business at a reasonable price.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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