Why Primary Health Care Limited shares could be cheap

Primary Health Care Limited (ASX:PRY) pays a great dividend and could provide significant upside.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The combination of market volatility and a disappointing annual report has led to Primary Health Care Limited (ASX: PRY) losing half its value in the last 12 months. At this price it now means that the company is paying out an estimated forward dividend yielding 6.1%.

This 6.1% dividend puts its 140 basis points ahead of the market average and more than double the current Health Care Equipment & Services sector average of 3.2%.

The disappointment that led to the shares plummeting stemmed from the company posting under consensus earnings thanks in part to subdued patient volumes brought about by a mild cold and flu season in comparison with a year previous. Furthermore, the whole industry took a hit in December, when the government proposed changes to bulk billing incentives for a number of healthcare services.

Analysts now expect earnings per share to drop year-over-year from 52.4 cents per share to 21.6 cents per share for the full year. I believe this drop has been priced in by the market now, hence why the shares are trading at a price-to-earnings ratio of just 7 currently.

To compare the shares fairly against its peers, Ramsay Health Care Limited (ASX: RHC) and Sonic Healthcare Limited (ASX: SHL), you have to look ahead and use their forward price-to-earnings ratio. The results of which I believe reveal the potential of significant upside for Primary Health shareholders.

Currently Primary Health Care shares trade at a forward price-to-earnings ratio of 11.4, whereas Ramsay Health Care and Sonic Healthcare trade at 25 and 17 times forward earnings, respectively. Looking at the entire sector as a whole shows that it is trading at 24.5 times forward earnings. It is worth noting also that the current price-to-book ratio is just 0.5, which could indicate that the shares are undervalued at the moment.

I feel that earnings have now found their bottom and we should begin to see mid-single digit earnings growth for the next few years. The share price could start to take-off to a similar forward price-to-earnings ratio as Sonic Healthcare if the news is positive when the company reports its interim results in the middle of February. Of course it is worth considering the consequence of earnings coming in lower. Despite the low levels it is trading at, it can still go lower, and almost certainly would do should full-year earnings be downgraded.

Foolish takeaway

I believe the above average dividend and the potential for significant share price gains makes Primary Health Care a great investment prospect in 2016.

Motley Fool contributor James Mickleboro 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »