What on earth has happened to the Estia Health Ltd share price?

It’s been a tough month for Estia Health Ltd (ASX: EHE) shareholders, who have watched their shares crash 19.5%. The shares are currently fetching $4.70, which also marks a 40.1% decline from their all-time high of $7.84 late last year.

To be fair to Estia, the industry as a whole has been battered by comparison to the broader market. Japara Healthcare Ltd (ASX: JHC) and Regis Healthcare Ltd (ASX: REG) shares have both fallen roughly 13% in the last month as well, with the benchmark S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) down a modest 2.6%.

What has happened?

Estia Health, as well as Japara and Regis Healthcare, all operate in the aged care space. Estia purchases and develops aged care facilities with a particular focus in Victoria, South Australia and New South Wales, although it does have some sites in Queensland as well.

While the trio are arguably well placed to benefit from the booming and ageing population of Australia, investors have certainly started to question the sustainability of their business models. A large part of this stems from their reliance on funding from the government, which leaves them susceptible to a pull back in government spending which could hinder their growth potential.

It was also speculated that the company was under a government audit in relation to funding claims. The company did respond to that speculation by saying that (my emphasis) “like all providers Estia is regularly audited by the government”, implying there was no materiality to what the media was suggesting.

However, the fact that the company is regularly audited doesn’t necessarily mean there is nothing to uncover. It certainly appears as though investors still have their doubts, perhaps exacerbated by the complex nature of many of the companies that operate in the aged care industry.

Compounding the issues, short sellers have been increasing their bets against the company, which has forced the share price lower, although that may be partially offset by recent share acquisitions by director Peter Arvanitis, who is the founder and former CEO of Estia.

Should you buy?

Given the discount at which Estia’s shares are currently trading compared to their 52-week high, some investors may be tempted to buy shares in the hope of a turnaround.

However, investors should also recognise the reasons for which Estia’s shares have fallen in the first place. They could recover, or the potential headwinds facing the business (and the industry) could materialise which could force the share price even lower instead.

Estia operates in a somewhat complex industry. It is reliant on government funding for growth while it is also heavily regulated, which could pose issues in the future. Investors may prefer to wait before buying shares in Estia and look instead at some of the businesses trading on the ASX that are easier to understand and still have the potential to generate significant gains in the future.

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Motley Fool contributor Ryan Newman 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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