Four healthcare stocks ready to rebound

Healthcare leaders struggled during the pandemic, but it’s time to look again at some of the better players.

Three beneficiaries of Covid testing are facing much tougher times ahead

As the wider world reopens post-Covid it highlights the potential for investors in healthcare: Four stocks worth looking are Ramsay, Resmed, CSL and ProMedicus.

Those who’ve been following private hospital operator Ramsay Health Care know the business has been struggling to keep operational momentum positive since 2016 when, not by coincidence, the share price peaked well above $80.

The latest trading update Ramsay might well prove important on multiple levels.

As far as Ramsay’s Australian business is concerned, the reopening momentum is strong. On the other hand, the business continues to struggle with multiple headwinds in Europe.

And while many a stock picker has nominated the shares for a post-Covid opportunity, it has been a two steps forward, one step backwards trajectory for the company over the past two years.

Analysts are divided about Ramsay’s future return profile: should one emphasise the positives locally or worry about the ongoing headwinds internationally?

Ramsay’s market update highlighted once again how selected areas of the healthcare sector on the ASX are benefiting as society reopens now beneficiaries – a fact the sharemarket seems to have all but forgotten about when short-term momentum is all about banks, financials, cyclicals and commodities. Ramsay is trading near $62.

Plasma and vaccines company CSL is the grand dame of Australian biotech and healthcare, or, if we want to choose a masculine label, the emperor among kings.

The share price hasn’t progressed for its third year in succession and on that basis, it would be easy to conclude the best years are now in the past, a la Ramsay Health Care. After all, doesn’t the sharemarket always know best?

Such assessment ignores the fact the global recovery in plasma collection is solidifying and CSL’s R&D pipeline looks poised for a number of positive developments, on top of the recently acquired Vifor group.

CSL is without doubt one of the highest quality operators on the local exchange. Forecasts are for double-digit percentage growth in successive years and the company’s track record provides ongoing strong support for guidance provided by management.

Most importantly: history shows this company can achieve guidance and growth irrespective of economic slowdowns on the horizon. FNArena’s consensus share price target is $324.80, more than 13 per cent above the share price at present which is close to $291.

Global sleep apnoea market leader ResMed’s has a share price which is around the same level as in early January – $33 – yet this is a high quality growth company trading on premium PE multiples.

ResMed is expected to reap long-term, sustainable benefits from product problems at competitor Philips. The recent quarterly update revealed momentum in regions such as Europe is not as strong, but the company remains on course for double-digit percentage growth for multiple years to come.

Chip shortages and other supply chain headwinds are still preventing the company from maximising its growth potential in the short term, but underlying increased market share and margins are preparing for the next future upside surprise.

ResMed is building an innovative software-as-a-service (SaaS) addition to its medical equipment platform, but time is needed for decisive profit contributions.

Similar to CSL, the wider reopening of most economies post-Covid is creating strong underlying demand for ResMed’s products and services after two years of disruption. Resmed is trading near $33.40.

Without doubt, the most exciting success story in Australian healthcare in recent years has been delivered by imaging software company Pro Medicus, with an ability to add ever more new customers, predominantly among US hospitals, at an increasing profit margin. The company has defied all sceptics.

Similar to CSL and ResMed, Pro Medicus is developing global leadership built on technological advantages. The key difference: the global market Pro Medicus is targeting is still in its infancy. Customers, sales, profits, dividends and margins are all on a steep upward trajectory – and have been for many years now.

Given it takes time to bring new customers on board with the company’s leading software solution, forward estimates are relatively predictable, similar to CSL.

For all these reasons, Pro Medicus shares are trading on what looks at face value an eye-watering PE multiple of 113x 2023 consensus EPS forecast, but today’s share price is not far off from where it was a year ago.

Investors will simply have to get comfortable with management’s strategy and execution, and grab the opportunity of a weaker share price at a level they feel comfortable with: Just now it is trading near $59.

Now that we highlighted some positive stories, it should be emphasised not every company carrying the healthcare label stands to benefit from reopening momentum; some companies are looking forward to a much more challenging outlook.

Three beneficiaries of Covid testing are facing much tougher times ahead, even with other sections of their respective businesses enjoying recovery momentum – Sonic Healthcare, Healius and Australian Clinical Labs.

While the share prices might look “cheap” or “undervalued”, this must be weighed against the prospect of possibly declining EPS profiles, potentially beyond FY23.

Others, such as Fisher & Paykel Healthcare, might prove a big bargain at the present share price level, but the market will want to see operational momentum turn for the better.

Similar questions surround the outlook for well-known players such as Cochlear, Nanosonics, as well as Ansell.

Rudi Filapek-Vandyck is the publisher at stock research service fnarena.com