With NHS waiting lists at all-time highs, this FTSE 250 stock has an enviable growth path.
Spire Healthcare, a leading independent hospital group in the UK, announced robust results for the first half of 2023.
The company’s strong performance, with a 13.1% increase in revenue driven by growing demand, reflects a broader trend. More individuals are turning to private healthcare, partly due to long NHS wait times exacerbated by the pandemic.
Spire says its success is a testament to its strategic adaptability and commitment to quality care.
Not optimistic enough?
Spire has a sky-high price-to-earnings (P/E) ratio of 42.6, suggesting investors are very optimistic about the company’s potential.
At the same time, a discounted cash flow model shows the stock is undervalued by 61%.
Typically, a high P/E ratio, such as Spire’s, would be a red flag, signalling market exuberance and a possible bubble waiting to burst.
However, the substantial undervaluation suggested by the discounted cash flow analysis implies the opposite.
In this rare case, investors might actually not be optimistic enough, despite the eye-watering P/E ratio.
Indeed, analysts forecast the company can grow its earnings at a whopping 36% a year. If Spire really can live up to this expectation, its stock price should soar. That’s because right now the market is pricing in a much gloomier scenario, in defiance of analysts’ cheer.
Inelastic demand
In 2023, inflation and the cost-of-living crisis loomed large, yet Spire appeared somewhat insulated. Research suggests that their typical private patient prioritises healthcare spending, potentially safeguarding the company from the worst financial pressures faced by other sectors.
Political risks abound
Of course, Spire has its challenges. The risks of investing in the UK’s private healthcare providers are obvious. Just five years ago, the Labour Party manifesto proposed an end to private providers in the NHS. If Jeremy Corbyn had won, that would have annihilated around one-quarter of Spire Healthcare’s revenue.
Another scenario worth considering is one in which the NHS’s waiting lists are dramatically reduced due to a massive funding injection. In that case, it would no longer seem so appealing to pay thousands of pounds out of pocket to jump the queue. Spire’s biggest rival is any business’ worst nightmare: a state-backed organisation handing out the same service with a price tag of zero.
But that’s only one scenario. Personally, I am not optimistic about the NHS’s ability to cope. The ongoing pressures on the NHS, exacerbated by an ageing population, seem likely to continue diverting more individuals and employers towards private healthcare options. Spire could also benefit from the shortage of skilled labourers in certain sectors in the UK if private health insurance increasingly becomes used as a way to retain talented workers.
I plan to open a small position in Spire when I next have spare cash to invest.
