Diurnal Limited (AIM:DNL), a GBP£70.37M small-cap, operates in the healthcare industry, which continues to be affected by the sustained economic uncertainty and structural trends, such as an aging population, impacting the sector globally. Healthcare analysts are forecasting for the entire industry, a highly optimistic growth of 36.57% in the upcoming year, and a whopping growth of 71.32% over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the UK stock market as a whole. Today, I’ll take you through the sector growth expectations, and also determine whether DNL is a laggard or leader relative to its healthcare sector peers. View our latest analysis for Diurnal
What’s the catalyst for DNL's sector growth?
New R&D methods and big data analytics are creating opportunities for innovations, however, stakeholders have been challenged to keep abreast of this structural shift while under pressure to cut costs. Over the past year, the industry saw negative growth of -47.78%, underperforming the UK market growth of 1.54%. DNL lags the pack with its sustained negative earnings over the past couple of years. The company's outlook doesn't seem to be much better given that analysts are forecasting continued unprofitability going forward.
Is DNL and the sector relatively cheap?
The biotech sector's PE is currently hovering around 38x, above the broader UK stock market PE of 18x. This illustrates a somewhat overpriced sector compared to the rest of the market. However, the industry did return a higher 25.47% compared to the market’s 12.78%, which may be indicative of past tailwinds. Since DNL’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge DNL’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? DNL's uncertain outlook is a negative for shareholders, with the prospect of negative earnings persisting into the future. If your view of the industry outlook has changed since you bought, now may be a good time to revisit your initial investment thesis. Also, if you’re relatively concentrated in retail, you may want to value DNL based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If DNL has been on your watchlist for a while, now may not be the time to enter into the stock given its negative future prospect. However, before you make a decision on the stock, I suggest you look at DNL's future cash flows in order to assess whether the stock is trading at a reasonable price, as well as other important fundamentals such as the company’s financial health in order to build a holistic investment thesis.