Why I’d dump the NMC Health share price and buy this health stock instead

The NMC share price gained nearly 10% Thursday, but I think buying now could be courting disaster.

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Shares in Smith & Nephew (LSE: SN) jumped 9.6% in early trading Thursday, on the back of strong revenue growth for 2019.

The company is big in orthopaedics, making hip and knee joints, and other related technology. In a world where wealth is rising, demand for high-tech healthcare is growing too.

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Revenue increased by 4.4% for the full year, and by 5.6% in the fourth quarter. That pushed group sales above $5bn for the first time in Smith & Nephew’s history.

The firm told us: “All global franchises and regions positively contributed to growth.” I think it’s telling that emerging markets saw a rise of 16.1%, and I’ll be looking there for further future gains.

Earnings per share dipped a little on a reported basis, from 76 cents a year ago to 68 cents. But on a trading basis, we saw a rise from 100.9 cents to 102.2 cents.

Dividends

Cash generated from operations increased nicely, to $1,370m (from $1,108m), and the dividend is up 4% to 37.5 cents per share.

That’s a yield of only around 1.5%, but it’s very well covered by earnings. And right now I think it’s right for Smith & Nephew to prioritise investing for growth ahead of providing big dividend income. Smith & Nephew expects to see underlying revenue growth of between 3.5% and 4.5% in 2020, and that looks in line with analyst expectations.

Smith & Nephew shares are up 38% over the past 12 months, so are they getting a bit peaky now? Forecasts suggest a 2020 price-to-earnings ratio of 24, which might look a bit high. But if growth continues apace, I think that could still turn out to be good value.

It’s a growth company on a high growth valuation, but I think it’s fully deserved.

NMC chaos

The intrigue is growing at NMC Health (LSE: NMC), whose shares blipped up nearly 10% Thursday morning.

Under pressure since Muddy Waters released a scathing attack on the company’s governance and announced a short position, founder and co-chair Bavaguthu Raghuram Shetty resigned earlier this week. It all comes amid confusion over the size of Shetty’s shareholding, with nobody really seeming to know.

There’s an ongoing legal investigation into the mystery, and the firm gave us an update on 18 February. It wasn’t nice, saying: “The board remains disappointed in the disclosures made by Dr Shetty.” It adds that the board “continues to encourage Dr Shetty and his advisers to ascertain the correct legal position in relation to his ownership of Ordinary Shares without further delay.” 

Confusion

The growing evidence seems bizarre. Shetty has apparently pledged a chunk of his shares against some bank loans. Other shareholders might own some of his reported holdings. And banks might have already sold some shares to enforce loan security. It boggles my mind.

Then on 19 February the story took a new twist. Czech investor Krupa Global Investments said it would not take a strategic stake in NMC unless Shetty is reinstated.

What should private investors do? I’m amazed that a FTSE 100 company can get into such an impenetrable mess. And if the board and chair can’t work out who owns what, how can we trust their competence in running the company’s finances?

I’ve admired NMC’s apparently successful growth in the past, but today I’d steer well clear.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and 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.

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