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.

There are other stocks with a strong earnings growth profile as well. The experts at the Motley Fool have uncovered three emerging industry “disruptors” that are well placed to grow over the medium to longer-term.

Click on the free link below to find out what these stocks are and why they should be on your watchlist.

The Disruptors: 3 Revolutionary Aussie Companies to Back for 2018

We’re living in one of the most exciting times in investing history. Innovation and a booming culture of entrepreneurship are constantly creating new companies with the potential to make forward-thinking investors very rich. Now more than ever, one small, smart investment could make a huge difference to your wealth.

That’s why at The Motley Fool we’ve been scrutinizing the ASX to uncover the kinds of companies that we believe could turn into the next Cochlear or REA Group.

We’ve found three exciting companies that we believe re poised to perform in the new year. Click here to uncover these ideas!

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.