MENU

Why I think the Paragon Care Ltd share price is a good long-term opportunity

The Paragon Care Ltd (ASX: PGC) share price has fallen by about 10% since the start of 2018, but over the past five years has grown by 152%.

Paragon is a small cap healthcare business that supplies medical products and equipment like beds to hospitals, aged care facilities and other healthcare locations.

I believe there are several reasons to like Paragon, here are a few of them:

Acquisition expansion

Paragon’s key strategy is to expand the business through acquisitions. A simple roll-up strategy can work out okay, but I think Paragon’s strategy is quite effective.

It is steadily acquiring businesses that supply different healthcare products with different sets of customers. This means that over time, as Paragon makes more bolt-on acquisitions, it can offer its clients more of their purchasing needs and the new acquisitions may provide Paragon with another set of clients.

For example, Paragon recently acquired Surgical Specialties Group for $32.4 million. This acquisition is expected to be earnings per share (EPS) accretive in FY18, whilst adding $30 million of annual revenue and $4.9 million of earnings before interest, tax, depreciation and amortisation (EBITDA).

Customers

Paragon supplies a variety of different healthcare markets including aged care, hospital & acute care, primary care, eye care, storage solutions, service & technology management, e-health and diagnostics.

According to the company, before its recent acquisitions, 80% of Paragon’s revenue came from hospitals and 80% of that came from the public system whilst the other 20% came from the private sector.

With Australia’s clear ageing demographics it’s obvious the growth in total healthcare expenditure will continue to grow and Paragon could benefit from this if it becomes a major supplier for the public sector.

Underlying growth and dividend

It’s hard to get a gauge on the true performance on the business at the moment due to all of the acquisitions, so FY18’s figures could be quite messy. However, according to Paragon’s figures the company is expecting revenue (before acquisitions) to be between $125 million to $135 million in FY18 compared to $117.2 million in FY17.

Earnings before interest, tax, depreciation and amortisation (EBITDA) (before acquisitions) is expected to come in at between $18 million to $19 million in FY17, compared to $17.1 million in FY17.

Most importantly, the company expected that earnings per share (EPS) before acquisitions would have been 6.4 cents per share, which would have been 3.2% growth.

If the company can continue to deliver EPS growth whilst maintaining a reasonably conservative balance sheet then Paragon could do well.

I also like that it has grown its dividend each year since it started paying a dividend in 2013. In March 2014 it paid a dividend of $0.005 per share, last month it paid a dividend of $0.011 per share – more than doubling its half-year dividend.

Valuation

Paragon is trading at trading at 11x FY18’s underlying earnings, if we take the 6.4 cents EPS figure as a true reflection of what the earnings may have been without the acquisitions.

In anyone’s book, a price/earnings ratio of 11 is low and is cheap. If Paragon’s p/e ratio increases to just 13 and it achieves reasonable EPS growth then it could create good returns for shareholders.

Foolish takeaway

However, there are risks too. The acquisition strategy can be problematic if the company takes on too much debt or if one or more of the acquisitions don’t work out.

Healthcare costs have also come under public scrutiny in recent times, so Paragon will have to work hard to offer the best value, whilst also increasing profit margins over time.

At the current price I believe Paragon could be a good long-term option for investors wanting to buy a small parcel of Paragon.

But, if Paragon’s roll-up strategy then this growth share could be a better choice – it’s predicting profit growth of 30% in FY18.

OUR #1 dividend pick to grow your wealth over the new financial year is revealed for FREE here!

Financial year 2018 is here and The Motley Fool’s dividend detective Andrew Page has revealed his must buy dividend share to grow your wealth in 2018.

You might not know this market leader's name, but it's rapidly expanding into a highly profitable niche market here in Australia. Even better, the shares boast a strong, fully franked dividend that should balloon in the years to come. In other words, we're looking at the holy grail of incredible long-term growth potential AND income you can watch accruing in your account in real time!

Simply click here to grab your FREE copy of this up-to-the-minute research report on our #1 dividend share recommendation now.

Motley Fool contributor Tristan Harrison owns shares of Paragon Care Limited. The Motley Fool Australia has recommended Paragon 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.