Shareholders of FTSE 100 hospital operator NMC Health (LSE: NMC) saw the value of their stock fall by more than 30% in the week before Christmas after US short seller Muddy Waters released a highly critical report on the firm.
Muddy Waters’ report contains allegations of accounting irregularities. NMC has strenuously denied any such irregularities, but I suspect that many investors will be concerned about this situation and unsure how to act.
In this article I’m going to take a broader look at NMC and give my view on the stock. I’ll also consider the outlook for another FTSE 100 stock with a strong track record of growth.
What’s the story?
NMC Health is the largest private healthcare operator in the UAE. According to the firm, it’s also “amongst the leading fertility service providers in the world”. Last year, 87.6% of revenue came from the UAE. The remainder came from a mix of operations in Western Europe and elsewhere in the Middle East.
NMC is 46 years old, but only listed on the London Stock Exchange in 2012. This listing was followed by explosive growth that saw the group’s revenue quadruple from $551m in 2013 to $2,057m in 2018.
Profits rose by 265% from $69.1m to $252m over the same period, and between January 2013 and December 2018, the share price rose by 1,289%!
Although it’s publicly listed, 51% of the group’s shares are held by three individuals, including two board directors. This suggests to me that smaller investors, including UK fund managers, are unlikely to have much influence on how the company is run.
Should you buy NMC?
The firm has made a lot of money for early investors who held on to their shares. But the group’s rapid expansion has been fuelled by debt — my analysis shows that net debt has risen from $63.7m to $1,521m since 2013.
In fairness, this business does seem to generate plenty of cash. But it spends a lot too. I’m concerned about what will happen when the group’s double-digit annual growth rate starts to slow.
The stock’s recent fall has left it looking more reasonably valued, on about 15 times 2019 forecast earnings.
However, I feel that the firm’s high degree of leverage and its overseas focus add risk for UK investors and make the outlook harder to assess. I’ve put this stock in the ‘too difficult’ pile and will continue to avoid it in 2020.
One stock I’ve been buying
I’m more bullish about cruise ship operator Carnival (LSE: CCL). This FTSE 100 firm is the largest company in this fast-growing sector, but the Carnival share price has fallen by 25% over the last two years.
Rising costs and one-off political events have hit the group’s operating margin, which fell by almost 2% to 15.7% last year. However, I still see this as an attractive level of profitability that reflects the group’s market-leading scale.
Looking ahead, the company says that bookings so far for 2020 are at record levels, in terms of occupancy.
I think that the Carnival share price probably got ahead of itself when it peaked at over £50 in 2017. But with the price now hovering around £37, the stock trades on just 11 times forecast earnings with a 4.2% dividend yield. I think this looks decent value. I’ve been adding the shares to my own portfolio in recent months.
