While a profit warning can send investors into panic, it often proves to be a buying opportunity. In some cases, the scale of difficulties facing the company in question may not be insurmountable. And for many stocks, it could be one underperforming unit or division which is expected to return to more normal levels of performance over the medium term. Reporting on Tuesday morning was a healthcare stock which could fall into that category after a somewhat disappointing update.
A tough period
The company in question is multi-disciplinary private healthcare company, Mediclinic (LSE: MDC). Its update showed that trading performance from its two largest platforms in Switzerland and Southern Africa has been in line with expectations. However, the challenging environment in Abu Dhabi has continued into the second half of the year. Patient volumes and operating performance have been below expectations, with a particularly disappointing performance recorded in January.
The effect of this on Mediclinic’s Middle East revenues and profit margins is set to be negative. It now expects a steeper revenue decline than previous guidance, while EBITDA (earnings before interest, tax, depreciation and amortisation) margins are due to be between 10% and 11%.
Growth potential
Despite this poor performance, the company’s plan to turn around its under-performing Abu Dhabi operations seems to be sound. It is in the process of recruiting new doctors to fill a spike in vacancies. Alongside this, the integration of the recently acquired Al Noor business could create synergies and help to stabilise further challenges in the Middle East division.
Looking ahead, Mediclinic is expected to record a rise in earnings of 21% in the next financial year. It is then due to follow this up with growth of 12% in the 2019 financial year. If it meets its forecasts over the next two years and reverts to its four-year historic price-to-earnings (P/E) ratio of 19, Mediclinic’s shares will trade around 24% higher than today. However, given the difficulties it is facing, investors may wish to be prudent and seek a gain of 15%-20% in case there are downgrades to its guidance between now and 2019.
Sector peer
Even though Mediclinic may be worth buying after its profit warning, sector peer NMC Health (LSE: NMC) could outperform it over the next two years. It is forecast to record a rise in its bottom line of 36% this year, followed by 27% next year. Despite this, it trades on a price-to-earnings growth (PEG) ratio of 0.7. That’s around half of Mediclinic’s PEG ratio. And since NMC has not released a profit warning of late, its outlook may be more reliable than that of its sector peer.
Certainly, NMC has relied upon debt-fuelled acquisitions to fund recent growth. However, given the dovish outlook for interest rates over the next few years, the cost of servicing debt is unlikely to become a major problem. And since it offers such a wide margin of safety, it could prove to be a sound buy.