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Why Primary Health Care Limited (ASX:PRY) shares crashed lower today

Large man falling off end of plank

The Primary Health Care Limited (ASX: PRY) share price has been one of the worst performers on the local market on Thursday.

At the time of writing the healthcare company’s shares are down a sizeable 10% to $3.48, wiping out all the gains that they had made in 2018.

Why are Primary Health Care shares plunging lower?

With no news out of Primary Health Care this morning, today’s decline is likely to be attributable to a broker note out of UBS.

According to the note, the broker has downgraded the company’s shares all the way down from a buy rating to a sell rating. UBS has also cut the price target on the company’s shares to a lowly $3.50 from $4.00.

The sudden change in opinion is largely down to the broker changing the analyst covering the company.

The new analyst has adjusted the broker’s valuation after reducing its earnings forecasts by as much as 9% for FY 2019 and FY 2020.

In addition to this, the broker didn’t believe that the share price had factored in the risks to its earnings next year.

Should you buy the dip?

Based on the broker’s forecasts, Primary Health Care’s shares are now changing hands at just over 19x full-year earnings and around 18.5x estimated FY 2019 earnings.

Given its challenging growth profile, I don’t believe this represents value for money even after today’s sizeable decline.

As such, I would put Primary Health Care with both Ramsay Health Care Limited (ASX: RHC) and Healthscope Ltd (ASX: HSO) as healthcare shares to avoid right now.

Instead, I would suggest that investors focus their attention on healthcare shares which are exhibiting strong growth such as Cochlear Limited (ASX: COH) and ResMed Inc (ASX: RMD). While both trade at a premium to the market average, I believe their medium term growth prospects more than justify this.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Cochlear Ltd., Ramsay Health Care Limited, and ResMed Inc. 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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