Should you buy Capitol Health Ltd at this share price?

Credit: PerformanceHealth

Although the ALL ORDINARIES (Index: ^AXAO) (ASX: XAO) has fallen 1.6% today, shares of Capitol Health Ltd (ASX: CAJ) have managed to buck the trend and are trading 3.6% higher.

Unfortunately, today’s rise will be little consolation for shareholders of the medical imaging group who have watched Capitol Health’s share price fall nearly 74% since March. The shares are currently trading for 29 cents, down from $1.11 roughly nine months ago.

Who is Capitol Health?

Capitol Health operates in Australia’s diagnostics imaging industry alongside big-name players such as Sonic Healthcare Limited (ASX: SHL) and Primary Health Care Limited (ASX: PRY).

It’s certainly an attractive market to be in. According to IBIS World, the industry is expected to generate $3.4 billion of revenue in the 2015-2016 financial year while a growing and ageing population could certainly drive growth for years to come.

What’s gone wrong?

While there is a lot to like about Capitol Health, the share price has fallen heavily as a result of changes to the Medicare scheme. In an update to the market in October, the company said the Federal Government’s Medicare Benefits Schedule (MBS) review had led to changes in referral patterns in some areas, leading to a downgrade in revenue guidance for the 2016 financial year.

What the MBS is designed to do is improve patient outcomes and cut unnecessary costs for the Australian government, including a crackdown on doctors ordering too many scans and x-rays which can cost hundreds of millions of dollars per year. The money saved by the government could come at the expense of companies like Capitol Health.

Indeed, Primary Healthcare is also susceptible to these changes, as is Sonic Healthcare. However, the latter is less reliant on the Australian market with more than half of its revenues being generated overseas in the 2015 financial year, putting its prospects under less of a cloud.

Should you buy?

It should be noted that there are still risks facing the business which could see the shares fall even lower. In saying that however, at its current price, Capitol Health is certainly an appealing investment idea and one that is worthy of closer inspection by long-term investors.


Forget BHP and Woolworths. These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

Motley Fool contributor Ryan Newman 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. You can follow Ryan on Twitter @ASXvalueinvest.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.