Why I think it’s time to buy this FTSE 100 stock, down 25% in two months

Rupert Hargreaves discusses the valuation and prospects of a fallen FTSE 100 (INDEXFTSE: UKX) flyer and a savaged mid-cap with a trading update out today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When a defensive stock falls on hard times, it can be the perfect opportunity for savvy investors to snap up a bargain. Take NMC Health (LSE: NMC) for example. This is one of the largest private healthcare operators in the world. But over the past two months, shares in the company have declined by just over 20%, underperforming the FTSE 100 by approximately 15%.

For existing holders, these declines are disappointing. But for buyers, the fall is fantastic news as the stock is now 20% cheaper than it was just a few weeks ago.

On sale?

It seems the main reason why the market has soured on the company over the past two months is because the City has downgraded its growth expectations. 

At the beginning of August, analysts were expecting the company to report earnings per share (EPS) of $1.47 for 2018. Two months on, and this target has been revised lower to $1.41.

Earnings downgrades are always disappointing, but in this case, it seems as if the market has overreacted. The full-year target might have been revised lower by approximately 5%, but year-on-year growth is still expected to come in at 47%, giving a P/E of 29.7.

Beyond 2018, the growth outlook for the company is equally impressive. Analysts are expecting EPS growth of just under 30% in 2019 and, in the years after, I’m confident that the group can continue to print double-digit growth rates.

Base for growth 

NMC has built itself a strong base in its UAE home market, and the company can use this to expand around the globe. As demand for healthcare services is only set to grow, NMC shouldn’t have any trouble expanding its presence, in my view.

With this being the case, NMC’s rapid near-term expansion, the potential for long-term growth, and resilience through the economic cycle all lead me to rate the stock a ‘buy.’

I’m not so positive on the outlook for NMC’s peer Mediclinic International (LSE: MDC). As NMC has prospered, Mediclinic has struggled to produce positive returns for investors. After peaking at 1,100 towards the end of 2016, the stock has since lost more than 60% of its value.

A profit warning from the firm today has wiped another 15% off the value of the company. In sharp contrast to NMC’s rapid expansion, FTSE 250-listed Mediclinic’s revenue dipped 1% in the first half of the financial year. Adjusted earnings before interest, taxes, depreciation and amortisation, on a reported basis, were down by 8%.

This performance doesn’t inspire confidence. It’s just the latest in a string of disappointing growth updates from the group, which has seen EPS slide from 40p in 2013, to an expected 30p for 2019.

With no improvement in the company’s fortunes in sight, I’m in no rush to buy the shares. A valuation of 15.7 times forward earnings seems too rich, especially for a business that has consistently disappointed investors. NMC is the stock for me.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended NMC Health. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »