At the end of December, shares in NMC Health (LSE: NMC) crumbled after the well-known short-selling hedge fund Muddy Waters published a short dossier on the company.
Muddy Waters claims that NMC has been misleading investors on several fronts, including potential overpayments for acquisitions, inflated margins and understated debt.
The hedge fund is also worried about the company’s corporate governance, or lack of it. A small group of UAE-based billionaires controls NMC.
For its part, the healthcare company has refuted all of the accusations levied against it. The group issued a long rebuttal to the assertions shortly after Muddy Waters published its document. Management has also commissioned an independent review to reassure investors.
However, Muddy Waters has claimed that NMC’s written rebuttal is “misleading, and outright false in certain portions,” and that independent reviews are usually exercises in “whitewashing that provide little to no transparency and accountability.”
A similar path
Muddy Waters’ attack on NMC has followed a similar path to the hedge fund’s attack on Burford Capital earlier in 2019.
In that case, the fund also issued a short dossier and then proceeded to accuse managers of misleading investors further when Burford published a rebuttal. But after creating a great deal of fuss at the time, the hedge fund’s attack has petered out over the past few weeks.
Will the same happen with NMC? At this point, it is difficult to tell. However, what we do know is that after recent declines, shares in NMC look cheap compared to its projected growth.
Growth at a reasonable price
The stock is trading at a forward P/E of 14.9 compared to its five-year average of 25+. City analysts are forecasting earnings growth of 26% for 2019 and 28% for 2020, which puts the stock on a PEG ratio of 0.5, suggesting that shares in NMC offer growth at a reasonable price.
That being said, while NMC looks cheap compared to its history, I don’t think the valuation is low enough to make up for the uncertainty here.
In my opinion, one of the reasons why the stock dropped so much after Muddy Waters’ attack was its valuation. Before the attack, the shares were dealing at a forward P/E of nearly 30, a multiple that did not leave much room for error.
The stock’s current forward P/E of 14.9 is more in line with the UK healthcare industry average of around 15.
The bottom line
So overall, at this point, I think it is difficult to tell if Muddy Waters’ accusations against the firm are correct or without merit.
Nevertheless, on valuation alone, I’m not a buyer of the NMC share price at current levels because even after the stock’s recent declines, I do not think it looks cheap enough to make up for the risks of investing here.
In other words, I think there are better places to invest your money in the current market that come with less risk and have more upside potential.
