Many people would agree that the NHS will continue to be one of the most controversial and critical issues tackled over the coming years. With the UK’s ageing population and various complexities, further influence from the private sector is frequently proposed as a solution. This means a range of FTSE 250 companies show tremendous potential. I’ve got my eye on one that seems to tick all the boxes to benefit from this shift.
Spire Healthcare
As NHS waiting times continue to frustrate many, companies offering treatment via the private sector have seen impressive levels of growth. Spire Healthcare (LSE:SPI) is the second-largest of these, owning and operating a range of private hospitals and clinics across the UK. In the latest earnings report, the business saw profits grow by 24% compared to the same period last year. As annual spending grows in the NHS, up over 17% last year, Spire seems to be capturing a healthy portion of the market.
With over 7.6m people awaiting treatment as of November 2023, there is clearly a strong future for the sector. Interestingly, the share price has not reflected this significant growth over the last few years, with a relatively unremarkable return since 2021.
Valuation
Growth increasingly steadily as the share price stays fairly static is one of my favourite looks for a potential investment. Separating the performance of the company and share price is always a good idea. However, when the gap between where the share price is, and where it could be, gets this big, I start to get excited. Based on a discounted cash flow, the current share price of £2.24 could be as much as 63% undervalued. Of course, this isn’t a guarantee, but I see real potential in the sector as more patients switch to private care.
Clearly, there is more than one company involved. Many investors may be spooked by the relatively high price-to-earnings (P/E) ratio of 40 times, but with the sector average at 28.5 times, I don’t see this as a huge problem as growth continues to accelerate.
Catalysts
With the earnings of the company expect to grow at 36% next year, many investors will be looking to see if this can continue over the long term. I see a number of key catalysts that could lead this to continue, most notably the continued industrial action from junior doctors. Compared to the growth in the competition, with an average of 17%, the firm is way ahead.
As the next UK election closes in, I see the NHS being one of the most hotly debated topics. With the national challenges previously outlined, the next government is likely to see interventions from the private sector as entirely necessary, and Spire is in a strong position to offer these solutions.
Am I buying?
Healthcare is clearly going to be an area of growth for the future across the world. With populations growing, and increased levels of patient care required, I see this FTSE 250 company as a potential winner. Of course, there is plenty of this potential already baked in to the share price. However, I suspect that the company could be a market leader by the time the NHS opens up to private companies over the coming years. I’ll be adding it to my watchlist.
