The ASX has been a major disappointment in the last year, with it falling by 2% during that time. A key reason for this is the poor performance of the commodities sector, with prices falling across the board and leaving one of Australia's most important industries on its knees. As such, investors in that sector have endured a significant amount of pain, with billions of dollars being wiped off portfolios.
One sector which has soared during that period is health care, which accounts for around 10% of world GDP. Therefore, it remains a lucrative sector and, while people may trade down on groceries, clothing and other goods and services during recessions, the chances of the profitability of health care companies taking a hit from reduced consumption are relatively low.
Therefore, the sector has huge appeal due to its defensive merits, with the likes of pharmaceutical company CSL Limited (ASX: CSL) and private hospital operator Ramsay Health Care Limited (ASX: RHC) soaring by 23% and 17% respectively during the last 12 months.
Looking ahead, both companies have considerable growth potential, with CSL set to reap the benefits of its recent acquisition of Novartis' influenza vaccine business for US$275m. This will create the second largest influenza vaccine business in the world and deliver considerable economies of scale for CSL through which to increase its market share of the US$4bn global industry.
Furthermore, CSL has a healthy product pipeline, with a number of treatments in clinical development and research stages. This pipeline has the potential to allow CSL to outperform many of its index peers over the medium to long term but, since its focus is on patented treatments, it is susceptible to the boom/bust patent cycle. As such, and while its future growth prospects remain sound, CSL is not as defensive as a business such as Ramsay Health Care, which is focused on the more stable provision of private hospitals.
In fact, Ramsay's economic moat appears to be wider than that of CSL. Certainly, CSL seeks patent protection, but there is a risk that treatments coming off patent will not be replaced by an equivalent in terms of sales potential. Ramsay Health Care, though, has an entrenched position in Australia and in Europe, with growth potential across Asia, too. Additionally, alongside organic growth, it has numerous brownfield expansion sites planned as well as the financial firepower to make further acquisitions following its purchase of GdS in France for $620m.
When it comes to their volatility, the two companies are closely matched. Both have low betas of 0.5 (Ramsay) and 0.6 (CSL), which indicate that their shares offer relatively strong protection against a market crash. Similarly, their price to earnings growth (PEG) ratios are identical at 1.4, while their dividend yields are tied at 1.9%, with both companies having high potential to increase dividends at a rapid rate due to their modest payout ratios of 43% (CSL) and 50% (Ramsay).
However, the stability which Ramsay continues to show regarding its bottom line growth is the key differentiator between the two companies. While both look set to beat the ASX in future, the chance of a profit warning seems to be higher at CSL, while Ramsay appears to offer excellent, reliable growth in future years.
