Have healthcare stocks been pushed too high?


Sonic Healthcare Limited (ASX: SHL) has announced its full year’s result today, reporting a 7% increase in full year net profit to $316 million, on revenues of $3.3 billion.

Cash flow from operations was strong, coming in at $487 million, a 19% rise over last year. The company declared a final dividend of 35 cents, the same as last year’s. The total dividend for the year was 59 cents, partly franked to 28%.

The company’s medical centres division had the biggest jump in revenues, rising 35%, while the pathology division also posted strong growth – apart from New Zealand, which was down 6%.

Revenues were also driven by a multitude of acquisitions globally, although the strong Australian dollar had the effect of reducing the revenue number by $77m in constant currency terms, compared to 2011.

Total debt increased slightly to $1.7 billion, related to acquisitions mentioned above.

Health care sector stocks have been in focus since the beginning of the year, as they are usually insulated from offshore events, such as the European debt crisis, although some companies like Ramsay Health Care (ASX: RHC) operate private hospitals in countries like Indonesia, France and the UK. That hasn’t stopped shares in Ramsay rising 26% since the start of the year, compared to the S&P / ASX 200 index, which has risen just 7.8%.

Sonic’s pathology competitor, Primary Health Care Limited (ASX: PRY) is more focused in Australia and is trading just below 52-week highs of $3.61, mainly thanks to strong demand for health care stocks. Even Sigma Pharmaceutical Limited (ASX: SIP) has seen its shares in demand, rising 21% since the beginning of this year, despite risks to the company from reforms to the Pharmaceutical Benefits Scheme (PBS).

Getting to the outlook for the 2013 year, Sonic expects to grow earnings before interest, tax, depreciation and amortisation (EBITDA) by 5 to 10% over the 2012 level of $624m, on a constant currency basis.

The Foolish bottom line

Another solid result from a solid performer, although earnings per share growth have been harder to come by over the last 5 years, averaging just 8%. By comparison, revenues have grown by an average of 13%. Over the last 10 years, Sonic had average earnings per share growth of 22%, which suggests that Sonic’s fast growth phase is over, and it’s now in a slower growth mode. Trading on a trailing P/E ratio of over 16, it appears slightly expensive.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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