Primary evidence points to better days
The much maligned medical centre and pathology group Primary Health Care has had a 15 per cent fall in its shares since November. In the same period, the Australia Health Care Index has been a star performer, recording a gain of 15 per cent.
This 30 per cent underperformance can be attributed to several factors including low earnings growth, a lack of overseas exposure and a discount for management.
In recent weeks though, sentiment towards the stock has started to turn. The share price has climbed 5 per cent, breaking a long downward trend. In recent years, Primary has spent heavily on acquisitions and expanding its medical centre business. This has resulted in the return on equity dropping to about 5 per cent, meaning the company does not earn its cost of capital. Not a great result for shareholders.
There is a good chance Primary is now reducing its capital spending, which could help improve returns. Additionally, the medical centre business, the main driver of profits, seems to be enjoying better trading conditions. If the company can produce cash, pay down its debt and extract some earnings growth, the price-earnings ratio could expand 2 points from the current level of about 11 times earnings. This could cause the share price to climb to about $3.40.
GOOD AS GOLD
I am not a gold bug. Buying gold stocks is difficult because the underlying asset price does not depend on supply and demand. This does not mean you cannot make money out of the precious metal as evidenced by the 12-year bull run that has seen the price of bullion rise about 500 per cent.
Since August though, the bullion price has struggled, falling from a high of $US1900 an ounce to about $US1600 an ounce at present. Interestingly, this has been an orderly decline and a highly unusual way to end a multi-year boom. Most bull market tops are characterised by volatility and then a price decline. This alone suggests there may be life yet in the gold market - a very mature market.
On May 15, the price of bullion sunk to a low of US$1526 an ounce but has risen about $US100 an ounce. Could this be the beginning of the next big leg up in gold? This is very difficult to work out at this stage. However, if central banks around the world decide to give everyone a shot of extra liquidity, gold may just work its way higher, towards the inevitable end of a giant bull market.
What is even more intriguing is the fact gold bullion prices peaked well before share prices in gold companies.Shares of gold companies around the world are trading at their cheapest level in decades, compared with bullion prices. Investors interested in gold should ideally look back at gold stocks rather than bullion itself.
Additionally, if the Australian dollar falls against the US dollar, the attractiveness of local gold stocks rises. The scenario of gold moving up and the Australian dollar moving down, though, is rare, and you should not hold your breath.
RESILIENT REJECT
It is hardly news that traditional shop-front retail businesses are struggling at the moment. The shy consumer and the onslaught of the internet have crippled top line growth.
The Reject Shop discount variety chain should be resilient to these trends. The company concentrates on low-priced goods that are not easy targets for online retailers. These defensive qualities though have not stopped the group's share price falling 28 per cent since mid-March compared with a 4 per cent fall in the benchmark All Ordinaries Index.
Analysts covering the stock have been winding back their earnings per share forecasts following a deteriorating environment and a sagging Australian dollar. Adding to the company's woes is the stellar performance in recent times of the Wesfarmers group's Kmart, which competes with The Reject Shop in many areas.
The company is yet to comment, but at current levels it is trading at a price-earnings ratio of 11 times 2012-13 earnings. It is never wise to buy a company's shares if analysts are downgrading earnings, because no one is quite sure when that trend will end. However, The Reject Shop, with its defensive qualities, has a lot to offer prospective shareholders.
The company still has a big store roll-out program to implement over the next five years that should drive earnings. A retailer in this position can trade at a much higher P/Eratio. The store roll-out should be supportive as long as the management is able to buy quality stock and improve inventory turns.
It is worth watching this company for the commentary at the next result and gauging if the outlook is healthy despite soft current earnings.
The Sydney Morning Herald does not take responsibility for any stock tips. Readers should contact a licensed financial advisor.
Frequently Asked Questions about this Article…
Why have Primary Health Care shares underperformed the Australia Health Care Index?
Primary Health Care has lagged the Australia Health Care Index largely because of low earnings growth, limited overseas exposure and a perceived discount for management. Since November the stock fell about 15% while the index gained roughly 15%, producing about a 30% relative underperformance.
Is Primary Health Care showing signs of recovery and what could that mean for the share price?
Recent sentiment has started to turn: the share price climbed about 5% and the company appears to be enjoying better trading conditions in its medical centre business. If Primary reduces capital spending, generates cash, pays down debt and delivers some earnings growth, the price-earnings ratio could expand a couple of points from the current ~11x, which the article says could lift the share price toward about $3.40.
What does Primary’s return on equity of around 5% tell everyday investors?
A return on equity near 5% indicates Primary hasn’t been earning its cost of capital after heavy spending on acquisitions and centre expansion. For shareholders, that’s not ideal — improvement would likely require tighter capital spending, stronger cash generation and debt reduction to boost returns.
Should I buy gold bullion or gold stocks based on current market signals?
The article notes bullion enjoyed a long 12‑year bull run but has pulled back from highs (about US$1,900) to near US$1,600 and even US$1,526 before a recent bounce. It also points out gold company shares are trading very cheaply relative to bullion and suggests investors interested in gold might consider gold stocks rather than bullion itself. Keep in mind the outlook is uncertain and sensitive to central bank liquidity and currency moves.
What recent shifts in gold prices are important for investors to watch?
Important points from the article: bullion peaked around US$1,900, fell to about US$1,600, hit a low of US$1,526 on May 15 and then recovered roughly US$100. The piece highlights that further moves could depend on central bank liquidity decisions and that bullion’s orderly decline might leave room for another leg up, but it’s difficult to predict.
Why has The Reject Shop’s share price fallen sharply and is it still considered defensive?
The Reject Shop’s shares fell about 28% since mid‑March while the All Ordinaries fell about 4%. Analysts have trimmed earnings forecasts amid a weak retail environment and a softer Australian dollar, and competition from strong performers like Kmart has added pressure. The article still describes The Reject Shop as a defensive retail option because it focuses on low‑priced goods that are harder for online retailers to match.
What will drive The Reject Shop’s future earnings and what should investors watch next?
The company has a large store roll‑out planned over the next five years that could drive earnings, but success depends on management buying quality stock and improving inventory turns. Investors should watch the commentary at the next company result to gauge whether the outlook is healthy despite current soft earnings.
How should everyday investors react to analyst downgrades and the article’s outlooks?
The article cautions that buying a stock while analysts are actively downgrading earnings is risky, because it’s unclear when the trend will end. A sensible approach is to look for improving management commentary, clearer cashflow or operational signs before acting — and consider speaking to a licensed financial adviser for personalised advice, as noted in the article.
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