This ASX-listed healthcare stock is about to get a big earnings upgrade

This stock is probably the best profit growth story in the hospital space. I am referring to Paragon Care Ltd. (ASX: PGC) as its share price rallied to a three-month high in afternoon trade after management issued a bullish market update.

The stock surged 4.2% to $0.75 after the hospital equipment supplier reiterated its full year earnings before interest, tax, depreciation and amortisation (EBITDA) of $18 million to $19 million for the current financial year.

That may not be much above FY17’s $17 million figure but the forecast doesn’t include the earnings contribution from nine acquisitions that Paragon has recently undertaken.

If these were included, Paragon’s FY18 revenue and EBITDA would surge to around $220 million and $32 million on a pro-forma basis. The company posted revenue of about $117 million last year.

The $32 million EBITDA figure could still prove conservative as it doesn’t include any synergies from greater economies of scale.

Based on a 12-month outlook (assuming all nine acquisitions go through), the stock looks very good value as the stock is trading under 10 times price-earnings multiple.

In contrast, hospital operators like Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC), Healthscope Ltd (ASX: HSO) and Primary Health Care Limited (ASX: PRY) are trading on FY19 P/E of around 19 times to 20 times.

Hospital operators and hospital equipment suppliers may not be directly comparable on a P/E basis and the $200 million plus market cap of Paragon is a fraction of its larger peers, but the discount is still too wide in my view – particularly given the superior earnings growth profile of Paragon.

On the flipside, I don’t think Paragon has tried swallowing these many takeovers in one go before and that may cause some indigestion.

What’s more, Paragon recently changed chief executives and there are worries whether the company can continue its unbroken track record of successfully bedding down these bolt-on acquisitions even though the ex-CEO Mark Simari is still with the company to spearhead its merger and acquisition (M&A) efforts.

I can’t help but to think of the tragic decline of Vocus Group Ltd (ASX: VOC) when Vaughan Bowen gave up the CEO chair after a very successful stint growing M2 Telecommunications through acquisitions (M2 was merged with Vocus in early 2016).

Having said that, I am inclined to give Paragon the benefit for the doubt for now as the latest trading update should reassure the market that it’s business-as-usual for the fast growing healthcare player.

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Motley Fool contributor Brendon Lau owns shares of Paragon Care Limited and Vocus Communications Limited. The Motley Fool Australia owns shares of and has recommended Vocus Communications Limited. The Motley Fool Australia has recommended Paragon Care Limited and Ramsay Health Care Limited. 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 Scott Phillips.

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