Why I think it’s time to buy this FTSE 100 stock, down 25% in two months

When a defensive stock falls on hard times, it can be the perfect opportunity for savvy investors to snap up a bargain. Take NMC Health(LSE: NMC) for example. This is one of the largest private healthcare operators in the world. But over the past two months, shares in the company have declined by just over 20%, underperforming the FTSE 100 by approximately 15%.

For existing holders, these declines are disappointing. But for buyers, the fall is fantastic news as the stock is now 20% cheaper than it was just a few weeks ago.

On sale?

It seems the main reason why the market has soured on the company over the past two months is because the City has downgraded its growth expectations.

At the beginning of August, analysts were expecting the company to report earnings per share (EPS) of $1.47 for 2018. Two months on, and this target has been revised lower to $1.41.

Earnings downgrades are always disappointing, but in this case, it seems as if the market has overreacted. The full-year target might have been revised lower by approximately 5%, but year-on-year growth is still expected to come in at 47%, giving a P/E of 29.7.

Beyond 2018, the growth outlook for the company is equally impressive. Analysts are expecting EPS growth of just under 30% in 2019 and, in the years after, I’m confident that the group can continue to print double-digit growth rates.

Base for growth

NMC has built itself a strong base in its UAE home market, and the company can use this to expand around the globe. As demand for healthcare services is only set to grow, NMC shouldn’t have any trouble expanding its presence, in my view.

With this being the case, NMC’s rapid near-term expansion, the potential for long-term growth, and resilience through the economic cycle all lead me to rate the stock a ‘buy.’

I’m not so positive on the outlook for NMC’s peer Mediclinic International(LSE: MDC). As NMC has prospered, Mediclinic has struggled to produce positive returns for investors. After peaking at 1,100 towards the end of 2016, the stock has since lost more than 60% of its value.

A profit warning from the firm today has wiped another 15% off the value of the company. In sharp contrast to NMC’s rapid expansion, FTSE 250-listed Mediclinic’s revenue dipped 1% in the first half of the financial year. Adjusted earnings before interest, taxes, depreciation and amortisation, on a reported basis, were down by 8%.

This performance doesn’t inspire confidence. It’s just the latest in a string of disappointing growth updates from the group, which has seen EPS slide from 40p in 2013, to an expected 30p for 2019.

With no improvement in the company’s fortunes in sight, I’m in no rush to buy the shares. A valuation of 15.7 times forward earnings seems too rich, especially for a business that has consistently disappointed investors. NMC is the stock for me.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended NMC Health. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.