Is There Now An Opportunity In Estia Health Limited (ASX:EHE)?

Estia Health Limited (ASX:EHE), which is in the healthcare business, and is based in Australia, led the ASX gainers with a relatively large price hike in the past couple of weeks. With many analysts covering the stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. But what if there is still an opportunity to buy? Let’s take a look at Estia Health’s outlook and value based on the most recent financial data to see if the opportunity still exists.

See our latest analysis for Estia Health

What's the opportunity in Estia Health?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Estia Health’s ratio of 11.7x is trading slightly below its industry peers’ ratio of 13.47x, which means if you buy Estia Health today, you’d be paying a reasonable price for it. And if you believe that Estia Health should be trading at this level in the long run, then there’s not much of an upside to gain over and above other industry peers. So, is there another chance to buy low in the future? Given that Estia Health’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.

Can we expect growth from Estia Health?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. However, with a negative profit growth of -9.5% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Estia Health. This certainty tips the risk-return scale towards higher risk.

What this means for you:

Are you a shareholder? Currently, EHE appears to be trading around industry price multiples, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in your portfolio. Is your current exposure to the stock beneficial for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on EHE, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on EHE for a while, now may not be the most optimal time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. In addition to this, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help crystallize your views on EHE should the price fluctuate below the industry PE ratio.

Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Estia Health. You can find everything you need to know about Estia Health in the latest infographic research report. If you are no longer interested in Estia Health, you can use our free platform to see my list of over 50 other stocks with a high growth potential.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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