Up 60% in 2016: Can the Primary Health Care Limited share price go higher?

Credit: Anoto AB

If you had invested $10,000 in Primary Health Care Limited (ASX: PRY) shares at the turn of the year, your investment would now be worth over $16,000.

That’s a 60% return in just over three months and makes it one of the best performers on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) in 2016.

Despite the great performance of its shares this year, they are still down almost 30% in the last 12 months. Which I believe should be seen as a warning sign for investors.

The share price decline in the last 12 months is largely attributed to the government review into the Medicare Benefits Schedule. Towards the end of 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 has been a big blow to Primary Health Care and has potentially led to earnings growth stopping dead in its tracks. According to CommSec, in FY 2016 analysts are expecting earnings of 21.5 cents per share. But by FY 2018 the consensus is for earnings to drop down to 21.2 cents per share.

Unfortunately, I believe that if the company does produce results of this nature then the share price will be lucky to remain as high as it is now. But the good news for shareholders is that management has advised that there are projects underway which it hopes will drive margin expansion and recycle capital.

If management is successful with these initiatives then there is a good chance the company will become another turnaround story on the ASX. But this is a big “if’ and I would resist starting an investment in Primary Health Care at the current price.

Savvy investors certainly found themselves a bargain at the start of the year. But the shares are now priced at over 17 times estimated FY 2016 earnings, which is starting to look a little on the expensive side considering its low growth prospects.

Personally, I believe there are far better options in the healthcare industry right now that could make great investments.

Ramsay Health Care Limited (ASX: RHC) is my favourite in the industry. Although its shares are also on the expensive side, earnings are expected to grow by a massive 21% per annum in the next couple of years.

Another alternative for those looking for exposure to Australia’s health care sector could be ResMed Inc. (CHESS) (ASX: RMD). Being a market leader in a rapidly growing sleep apnoea market makes ResMed a great pick in my opinion.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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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