Why the Primary Health Care Limited share price is tumbling today

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Shares of Primary Health Care Limited (ASX: PRY) slumped as much as 8.4% today to a low of $3.50 after the company released a trading update this morning. They have since recovered some of their losses and are trading 2.9% lower, compared to a 1.8% lift for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

The company warned that it would miss its annual earnings guidance as a result of write-downs across the business.

Primary Health Care expects the non-cash impairments to amount to $98 million in after tax charges. $66 million of that will be accounted for in the current financial year while the remaining $32 million is required to be accounted for in prior periods.

However, the write-down would partially be offset by a $30 million profit on sales of Medical Director and Transport Health, together with other items from the group’s interim results which included the sale of its stake in Vision Eye.

As a result of the impairments, Primary Health Care no longer believes it can achieve its forecast range $110 million to $115 million in underlying net profit. Instead, it is guiding for underlying earnings of $104 million for financial year 2016. Otherwise, it said trading has been in line with expectations.

Although there is still much uncertainty related to the pathology and imaging industry due to the government’s review into the Medicare Benefits Schedule, Primary Health Care’s shares have recovered somewhat in recent months. This is partially due to delays in any bulk-billing changes by the government, together with ongoing rumours of a potential takeover of Primary Health Care by China’s Jangho Group.

However, more conservative investors should observe the risks facing Primary Health Care, and may want to look at other alternatives in the healthcare sector such as CSL Limited (ASX: CSL) or even Somnomed Limited (ASX: SOM).

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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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