The share price of Spire Healthcare (LSE: SPI) is one of the biggest fallers in the FTSE 350 today. The company is currently down 22% after it released a profit warning. It now expects EBITDA (earnings before interest, tax, depreciation and amortisation) to be materially below that from the previous financial year.
As a consequence of its profit warning, investor demand for its shares is likely to move lower. At the same time, healthcare industry peer GlaxoSmithKline (LSE: GSK) appears to offer an improving outlook which could help it to outperform the FTSE 100.
Spire Healthcare’s trading update showed that revenue declined by 1.1% to £475m in the first half of the year. EBITDA was around £66m at a margin of 14%, with the company seeing major declines in NHS revenues. They fell by 9.5%, while PMI revenues were down by 0.9% in what was a challenging period for the business. Trading conditions impacted on its financial performance to a greater extent than anticipated, and this situation could continue over the near term.
As a result, it would be unsurprising for the company’s share price to deliver further declines in the short run. Although the business is seeking to improve its clinical quality and could enjoy a competitive advantage over rivals in this regard, investors may now price-in a wider margin of safety due to the difficulties being experienced by the business.
Certainly, there is scope for growth within the private sector, and an increasing focus on this area could boost Spire Healthcare’s financial performance. But with a number of other stocks such as GlaxoSmithKline offering stronger prospects, there could be better opportunities elsewhere within the healthcare industry.
With the GlaxoSmithKline share price having risen by 19% since the start of the year, it continues to beat the FTSE 100. More outperformance could be ahead, since the business seems to be heading in the right direction when it comes to its strategy. It has a diverse business model and has resisted calls from some investors to split into different entities. In its current state, it offers a mix of growth potential from its pipeline and consumer brands, as well as defensive characteristics due in part to its diverse range of operations.
With GlaxoSmithKline having a dividend yield of around 5.2%, it continues to offer a wide margin of safety. Given that dividends have not risen in recent years, its cover is now at around 1.4. This suggests that dividend growth could restart over the medium term, and this may lead to an improving investment outlook.
Although the FTSE 100’s prospects appear to be sound, buying defensive stocks could be a shrewd move. The next bear market may not be too far away, and companies such as GlaxoSmithKline may perform better in more difficult trading conditions than the majority of their index peers.
Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.