Shares in FTSE 250 private hospital provider Spire Healthcare Group (LSE: SPI) spiked up 14% on 19 September.
In response to media speculation, the company told us it doesn’t think its market cap fully reflect its underlying value. The board confirmed it’s “commenced a process to hold discussions with a number of parties in relation to a range of potential options“.
Those options “may include … a potential sale of the company“. But the announcement stressed it’s all “highly preliminary and no decision has been made regarding whether any such option will be pursued at this stage“.
[fool_stock_chart ticker=”LSE:SPI” start_date=”” end_date=”” comparison_value=””]Time to buy?
What should potential investors do now? Some might buy in the hope the company is sold and they can bag a quick profit. In fact, the price rise suggests some already have. That’s always a gamble, and could well result in a loss should there be no sale. I’d never buy in the hope of a sale myself.
But if the company is considering so drastic an action because it thinks the stock is undervalued, I want to take a look. And my first step is to dig out the broker forecasts and check the valuation.
My first impression is… I like what I see from a long-term perspective. But I’m not sure I see a screaming undervaluation that would justify seeking a buyout.
We’re looking at a forecast price-to-earnings (P/E) multiple of 27 for the current year. Analysts expect earnings per share to then more than double between 2025 and 2027. And that could drop the 2027 P/E to around 12.5. Providing there’s further growth forecast by then, I could definitely see that being too cheap.
Recent profit
But we have to remember one key thing. Spire Healthcare was posting losses per share before 2022. And that year’s modest profit meant a P/E up at 109. In the next two years, earnings rises brought that multiple down to a trailing 36.5 by 2024.
To me, this seems like the expected transition between losses and profits. And it can take a few years for a consensus to build regarding the long-term value of a stock like this.
In the announcement, Spire pinned its undervaluation judgment partly on its “freehold property and a well invested asset base“. I see a forecast price-to-book ratio (PBR) of 1.3 times here. And while that’s modest, I don’t see an urgent need to unlock value on this basis.
This desire to release the stock’s valuation potential so speedily seems maybe a bit premature to me. And I expect a lot of shareholders would be happy to just hold while they see those healthy forecasts.
Bottom line
I like what I see in this company. And it really has me thinking about it. A shortfall in NHS services means more business is going Spire’s way. But there also has to be political risk with the government funding private healthcare.
I think investors should consider buying. And if I buy, it’ll be for the long term — and I’ll be hoping there’s no sale.
