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3 stocks with healthy investor appeal

Glenn Freeman  |  24 Jan 2018Text size  Decrease  Increase  |  
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Healthcare holds broad investor appeal, with its diverse array of companies occupying different niches, global reach, and the ageing population all supportive of the sector.

However, valuations for Australian healthcare companies are at historically high levels--a result of their outperformance relative to global peers and the broader market in recent years.

"Looking at the whole sector, the PE premium is now close to 100 per cent relative to the broader market ... and there are a number of companies with PE multiples at, or near, their own 10- to 15-year highs," says Daniel Moore, senior equities analyst and portfolio manager, Investors Mutual.

He points to Cochlear (ASX: COH), Fisher & Paykel Healthcare (ASX: FPH) and ResMed (ASX: RMD) as examples of stocks in the sector he believes are trading at particularly high multiples of 40 times, 37 times and 28 times, respectively.

"The premiums for these larger stocks makes us less optimistic about the sector's returns in the near term but, as always, there are stocks that are offer value--it's just that they are now much harder to find," Moore says.

Australian healthcare companies regularly feature within Morningstar's Australia and New Zealand Best Stock Ideas, with three under its coverage rated as "Accumulate" by Morningstar equity analyst Chris Kallos. Each of these also hold a narrow moat rating.

Two of them are private hospital operators: Ramsay Health Care (ASX: RHC) and Healthscope (ASX: HSO).

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Ramsay is the largest in this space, with a market capitalisation of more than $14 billion, 223 hospital and day surgeries, and more than 60,000 staff.

"We remain positive on Ramsay's move into community pharmacy, unveiled in fiscal 2016, and consider it complementary to acute treatment settings," Kallos says.

"We think the move increases the company's opportunity to engage with the patient by extending the company's reach into chronic disease management," he says, viewing the expanded service offering as particularly positive, "given age-related morbidities and the ageing of the Australian population".

With a recent closing price of $68.59, it trades at a substantial discount to Morningstar’s $87 fair value estimate.

Also holding a narrow moat, Healthscope is Australia's second-largest provider of private hospital services.

Kallos highlights ageing populations, advances in surgical and medical techniques, the government's continuing shift of medical service costs to the private sector and the outsourcing of public hospital management to private sector operators as key demand drivers.

Occupying a different segment of the healthcare space, Australian Pharmaceutical Industries (ASX: API) is the most vertically integrated of Australia's three national full-line pharma wholesalers.

Though Morningstar recently lowered its near-term earnings forecast for API by 2 per cent, "we retain our $2 per share fair value estimate," Kallos says.

He believes its medium-term introduction of new customer-engagement strategies, "an increasing focus on product offerings exclusive to Priceline, and the move away from heavily discounted categories ... towards colour cosmetics and skincare should be positive."

"Shares in API are trading at a significant discount to our valuation, and are therefore undervalued," Kallos says. The shares were trading at $1.38 at the time of publication.

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Glenn Freeman is a senior editor at Morningstar.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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