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Sonic Healthcare Limited v Primary Health Care Limited: Which is better value?

The healthcare sector is considered one of the most recession-proof industries on the ASX. However, it isn’t government proof.

The government recently tried to reduce the costs of a range of different pathology services, which is the majority of what Sonic Healthcare Limited (ASX: SHL) and Primary Health Care Limited (ASX: PRY) do.

Sonic has a market capitalisation of $8.5 billion and Primary has a market capitalisation of $2 billion.

Sonic is a much larger business because it has international operations in a number of countries including the USA, Germany and Switzerland. Around 59% of Sonic’s revenue comes from overseas. This gives Sonic an upper hand over Primary as the geographical diversification of its earnings (theoretically) makes it a safer investment.

Primary offers more than just pathology too and has started offering bulk-billed IVF services. This is a great service for people who can’t afford the full cost service from Monash IVF Group Ltd (ASX: MVF) and Virtus Health Ltd (ASX: VRT).

Dividend yield

Both Sonic and Primary offer a decent dividend yield, Sonic has a grossed up dividend yield of 5.31% and Primary has a grossed up dividend yield of 4.63%. These yields are nicer than the term deposit rates currently on offer.

Valuation

Sonic is currently trading at 17.9x FY16’s earnings, which is lower than the sector’s price/earnings ratio of 19.5x. It’s expected to grow earnings per share by 3% in FY17 (source: Commsec). This suggests it’s trading at 17.6x FY17’s estimated earnings.

Primary has a price/earnings ratio of 39x, which is a lot more than Sonic and the sector as a whole. It’s expected to grow earnings per share to 21.5 cents in FY17. This means it’s currently trading at 17x FY17’s estimated earnings.

Is it time to buy?

Healthscope Ltd (ASX: HSO) recently disclosed that it hasn’t seen increased activity during the first quarter. That update also affected Ramsay Health Care Limited’s (ASX: RHC) share price, but Ramsay reaffirmed its original guidance for the year.

So far neither Primary nor Sonic have indicated fewer numbers have been coming through the doors. Currently, I think the biggest threat to future results is the government’s aim to bring down costs.

I don’t think either of these businesses are trading at great value. Primary could have been a good buy in December 2015 when its share price dropped down to $2.26. At the current prices, I’d choose Sonic over Primary for its diverse international earnings.

For now I think it would be best for Foolish investors to wait on the sidelines until there is talk of the government trying to reduce costs again.

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Motley Fool contributor Tristan Harrison owns shares in Healthscope Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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