Primary Health Care Limited or Sonic Healthcare Limited: Which is the better bet?

One of the best performers on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) this year has been Primary Health Care Limited (ASX: PRY). Its shareholders will be delighted to have seen its share price climb by a whopping 50% since the turn of the year.

The question now is whether there will be further share price gains ahead which make Primary Health Care a good investment today.

Although the share price has climbed by 50% year-to-date, it is worth pointing out that investors who bought shares a year ago are still sitting on a 29% loss.

The share price decline has been attributed to the government review into the Medicare Benefits Schedule. Late last year Federal Health Minister Sussan Ley announced that 23 tests and procedures had been recommended for removal as part of a major overhaul to Medicare.

This review has been a big blow to Primary Health Care, and puts into doubt the future earnings growth the market has been expecting. In its slightly tepid interim report, management advised that its second half will be stronger and projects are underway to drive margin expansion and recycle capital.

Right now, after such a big jump in the share price, I personally would stay away from Primary Health Care. The shares are trading at an estimated forward price-to-earnings of 16, which makes them about fair value in my opinion.

If I were certain of earnings growth ahead I would be happy to be invested in the company. But with the future looking very unpredictable, I would favour an investment in rival Sonic Healthcare Limited (ASX: SHL) instead.

Sonic Healthcare is Australia’s largest pathology and diagnostic imaging provider. The big difference, however, is that Sonic Healthcare has operations all over the world, whereas Primary Health Care operates purely in the Australian market.

Because of this, Sonic Healthcare currently derives over half of its revenue from overseas. I feel this diverse business model should help offset some of the losses from changes to Medicare, and is the key reason I would choose it over Primary Health Care.

I was pleased with the solid interim results that Sonic Healthcare reported. I feel it is positioned well to meet market expectations of 106.9 cents in earnings per share. This means the shares are trading at an estimated forward price-to-earnings ratio of 17.

Because of the diversity of its business I would expect Sonic Healthcare to continue growing its earnings at a strong rate. In its interim result, earnings per share grew by approximately 11% year over year, which given the current environment was a great performance.

Foolish takeaway

There is no getting away from the fact that shareholders of Primary Health Care, Sonic Healthcare, Capitol Health Ltd (ASX: CAJ), and Healthscope Ltd (ASX: HSO) have had a terrible 12 months. They all face considerable headwinds in the months ahead, but I believe Sonic Healthcare is best positioned to be the standout performer of the group.

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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.

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