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Can Ramsay Health Care Limited’s share price bounce back after its 16% slump?

Ramsay Health Care Limited (ASX: RHC) is a leading global hospital operator with 221 hospitals and other health care facilities across Australia, the UK, France, Indonesia and Malaysia. It is the largest private hospital operator in Australia and has been one of the best ASX stocks to own over the last decade, with its shares up 4,150% since 2009.

So why is the Ramsay share price down 16% over the last 6 months?

It’s not because the company is performing poorly. Through the first half of FY2017 the group managed high-single-digit growth across revenue and EBIT, whilst core NPAT was up an impressive 12.8%. Australia’s contributions to group earnings were particularly strong and the company recently commenced work to establish an extensive domestic network of retail pharmacies, which currently stands at 22 outlets.

Further investment in capacity expansion across its operating regions is planned, and combined with ageing population tailwinds the outlook for the company is positive.

Ramsay shares don’t come cheap though, currently trading on a P/E of 27. I believe a general re-pricing of the hospital operators is taking place after years of outperformance.

Australian operator Healthscope Ltd (ASX: HSO) has seen its share price slump 26% in the last 6 months and now trades on a P/E of 21. Ramsay’s long history of growth and diversification of operating regions are key factors that should maintain its P/E premium relative to its smaller, Australia-focused competitor.

Another likely cause of the Ramsay share price drop is the news that group Managing Director and CEO Chris Rex intends to retire after 9 years in the position. Mr. Rex also spent 13 years as Chief Operating Officer and will continue to lead the company until a successor is found and transitions into the role.

As well as the current leadership uncertainty, Ramsay investors will have noticed Mr. Rex and Chief Financial Officer Bruce Soden sold a combined 510,000 shares earlier this month, totalling $34.7m. Both directors still have significant holdings in the company.

Foolish takeaway

Ramsay has proven to be an excellent company with diversified operations and a positive outlook for growth. The current share price momentum may provide long-term investors with a more reasonable entry point for a stock that has traded on a relatively high P/E in recent years.

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Motley Fool contributor Ian Crane has no position in any stocks mentioned. 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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