National HealthCare (NHC) has just shifted five skilled nursing facilities from management contracts to full ownership of both operations and real estate, backed by a recently secured term loan and revolving credit facility.

The new credit facilities and acquisition of the five skilled nursing facilities come after a period of strong momentum, with a 30 day share price return of 12.55% and a year to date share price return of 44.18%, alongside a 1 year total shareholder return of 81.88% that builds on very large 3 year and 5 year total shareholder returns. This suggests investors have been steadily repricing National HealthCare as these expansion plans unfold.

If you are comparing National HealthCare with other healthcare related opportunities, it is worth scanning a curated list of companies using our healthcare AI stocks screener to see what else stands out, starting with 40 healthcare AI stocks.

With National HealthCare stock up 44.18% year to date and trading at an estimated 70% discount to intrinsic value, are you looking at an overlooked compounder, or a healthcare operator where the market already anticipates the next leg of growth?

Price to earnings of 23.7x: Is it justified?

National HealthCare is trading on a P/E of 23.7x, compared with a peer average of 16.9x and a US Healthcare industry average of 23.3x. This puts the current $188.02 share price at a richer earnings multiple than many alternatives.

The P/E ratio compares the current share price to the company’s earnings per share, so a higher P/E usually means investors are willing to pay more today for each dollar of current earnings. For a healthcare operator like National HealthCare, that often reflects how the market views the quality, stability and potential growth of those earnings.

Here, the P/E premium comes alongside earnings growth of 14.6% over the past year, accelerating from a 1.4% per year pace over the past 5 years, and net profit margins of 8.1% compared with 7.9% last year. The stock also trades at a sizeable discount to the SWS DCF model estimate of $636.06 per share based on projected future cash flows. This indicates the market is pricing current earnings more highly than peers while still valuing the stock well below that cash flow estimate.

Versus the broader US Healthcare industry, National HealthCare’s 23.7x P/E sits slightly above the 23.3x average. This suggests investors are paying a modest premium to the sector for each dollar of current earnings, even though recent earnings growth did not surpass the wider industry’s 17% result.

Result: Price-to-earnings of 23.7x (OVERVALUED)

However, the bullish story can quickly cool if the new facilities underperform expectations, or if higher interest costs from the fresh debt pressure future earnings.

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Another way to look at value

While the 23.7x P/E hints at an expensive stock, the SWS DCF model paints a very different picture, with a fair value estimate of $636.06 versus the current $188.02 price. That gap suggests a wide margin between earnings based pricing and cash flow based value. Which story do you trust more?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out National HealthCare for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 47 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

Does this mix of strong past returns, a rich P/E and a large DCF gap leave you excited or cautious? Act while the data is fresh, compare the upside and downside, and ground your own view with the 2 key rewards and 1 important warning sign.

Looking for more investment ideas?

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• Target stability first by scanning companies on the 65 resilient stocks with low risk scores that could help anchor a more resilient portfolio.
• Hunt for potential mispricings by checking the 47 high quality undervalued stocks and see which stocks currently look attractive on both quality and price.
• Strengthen your income stream with the 10 dividend fortresses and spot higher yielding options that may complement growth focused positions.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.