Should you buy Primary Health Care Limited shares today?

It’s been a fantastic few weeks for shareholders of Primary Health Care Limited (ASX: PRY) who have watched their shares soar almost 50%, compared to a mere 2.4% return from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

Of course, the sharp gain does need to be taken in context. The company’s share price had been crunched during the previous 12 months and was trading near a 52-week low of $2.13. But even so, a 50% return over three weeks is great for new investors.

What’s happened to the Primary Health Care share price?

Primary Health Care is one of Australia’s biggest healthcare groups, generating revenue through its various medical centres while it also provides pathology and medical imaging services.

While healthcare is typically an attractive industry to be in – given its defensive characteristics as well as its ability to benefit from a growing and ageing population – it’s also highly regulated and often subject to government funding.

Unfortunately, companies operating pathology and imaging clinics have run into a huge roadblock in recent times, which has already proven costly to their revenues and bottom line figures.

The Federal Government is conducting a review into the Medicare Benefits Schedule with the aim to improve the overall outcome for patients, as well as reduce spending on healthcare it deems to be unnecessary for taxpayers. That will likely include a crackdown on doctors ordering too many scans and x-rays which can cost hundreds of millions of dollars per year.

Indeed, Primary Health Care isn’t the only company to have been impacted: Capitol Health Ltd (ASX: CAJ) reported weak first-half revenue and earnings growth, citing “system weakness” as the cause, while Sonic Healthcare Limited (ASX: SHL) also noted a decline in earnings from its Australian Laboratory and Imaging business.

Primary Health Care’s own half-year results, announced on 17 February, were by no means pretty, either. Revenue for the period grew just 4.6%, its underlying net profit fell almost 10% and its interim dividend was cut from 9 cents per share to just 5.6 cents per share.

Pleasingly however, it did say it is expecting a stronger second half, which may have been one of the catalysts behind the huge rebound over the last three weeks. It’s also transitioning to a ‘capital-light acquisition model’ and hopes to mitigate the impact of recent cuts to billing from the government by targeting cost savings across the business.

Should you buy?

Investors are often conflicted in circumstances similar to the ones facing Primary Health Care right now. On the one hand, they’re encouraged to buy shares of quality-businesses when they’re on the cheap; on the other, they’re encouraged to avoid trying to catch falling knives.

It’s difficult to see which camp Primary Health Care’s shares fit into right now. Of course, the share price has surged higher in recent weeks, but if the company cannot adequately overcome its challenges you can expect the shares to fall sharply again. In saying that, they’re not exactly priced for huge success either, so it could be a decent pickup for long-term investors as well.

Of course, you should always conduct your own due diligence before making any investment decision, and that goes without saying for buying shares of Primary Health Care as well. Whether you choose to buy shares in Primary Health Care could well come down to your risk-tolerance – the shares could generate great gains over the coming years if everything goes right, or else endure some pretty painful losses if they don’t.

In the end, you could well decide it’s simply not worth the risk buying its shares and choose to focus on another company with huge growth potential, instead.

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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.

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