Reaffirming double-digit earnings growth just wasn't enough to keep Australia's largest listed hospital operator in investors' good books today.
Shares in Ramsay Health Care Limited (ASX: RHC) tanked 3.6% to $63.97 in lunch time trade, which is about twice the loss of its peers like Healthscope Ltd (ASX: HSO) and Sonic Healthcare Limited (ASX: SHL).
One would have thought that Ramsay's defensive income stream and confirmation that it will deliver core net profit and earnings per share (EPS) growth of 18% to 20% for 2014-15 would have stimulated buying interest on a "risk-off" day like today where investors are shying away from buying risk assets like equities.
The bearish sentiment dragged the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) down 1.6% and prompted investors to focus on the negatives of Ramsay's announcement, for which there are a few.
Firstly, analysts really like the stock and may have been counting on a second profit upgrade following Ramsay's February results where management increased its EPS growth forecast to the current 18%-20% range.
The average consensus EPS growth estimate is for a 21.2% increase for the year ended June 30, 2015, followed by a 17.4% increase for the current financial year.
From this perspective, it feels like the profit affirmation is a profit downgrade.
What's more, analysts believe that profit margins will continue to expand in 2015-16 but I think there are reasons to question this assumption.
This is because I think hospital margins are going to come under pressure with private health insurer Medibank Private Ltd (ASX: MPL) playing hardball with hospital operators as it attempts to claw back costs. I think other health insurers will be following suit.
Further, Ramsay Generale de Sante's first half result is supporting my belief that its margins are under pressure.
Ramsay owns 50.9% of the French hospital network, which reported a 1.2% increase in revenue to €893.3 million, but an 8.2% drop in earnings before interest, tax, depreciation and amortisation (EBITDA) to €115.7 million.
The sharp drop in EBITDA is partly driven by a change in accounting standards, but the margin would still have fallen 90 basis points (0.9 of a percentage point) even if you discounted that.
There's also no denying that Ramsay Generale de Sante is facing a very unfavourable pricing environment.
While I think Ramsay is still an attractive stock to hold over the longer term, I suspect we are going to see some consensus downgrades for Ramsay which will create a short-term downside risk for the stock.
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