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Are Ramsay Health Care Limited or Healthscope Ltd buys at this share price?

The tailwinds of Australia’s ageing demographics are clear when you look at the projections for the expected number of people above 65 and 85 over the next couple of decades.

This is a good opportunity for any investor willing to take a long-term buy and hold approach with companies expected to benefit from the rise of the elderly.

Two of those companies are likely to be private hospital operators Healthscope Ltd (ASX: HSO) and Ramsay Health Care Limited (ASX: RHC).

Healthscope has a market capitalisation of $3.85 billion and Ramsay has a market capitalisation of $14.15 billion. I think there is plenty of scope for both to grow substantially over the years to come for the following reasons:

Expansion plans

Healthscope and Ramsay both have impressive plans for growth with large brownfield and greenfield projects.

For example, Healthscope is expected to complete its Northern Beaches Hospital in FY19, which will add 450 beds to Healthscope’s total.

Considering the large rise of the elderly over the coming years, as well as the general population growth, all the extra capacity should be readily taken up.

There is also the possibility of further expansion through acquisition. Ramsay has utilised this strategy superbly to expand into the UK and France, making it one of the top five hospital operators in the world.

Public health budget constraints

Governments around the world are going to struggle to maintain the current level of care, as healthcare costs rise substantially over time.

This is very likely to make a number of patients turn to the private system through choice or perhaps future government measures. High earners are already encouraged to get private health insurance with additional tax if they aren’t covered privately.

Lower costs

Somewhat surprisingly, the private sector is able to deliver the construction of hospitals at a much more affordable price compared to public hospitals.

The government may decide to utilise private operators even more in the future if the public construction costs can’t be brought down.

Risk

The key risk to Ramsay and Healthscope will be funding. The government, patients and private health insurers all want costs to be controlled, so management will have to tread carefully in the years ahead to make sure they aren’t too expensive.

Foolish takeaway

Ramsay is currently trading at 27x FY17’s estimated earnings with a grossed-up dividend yield of 2.55%. Healthscope is trading at 21x FY17’s estimated earnings with an unfranked dividend yield of 3.33%.

Healthscope is clearly trading cheaper, however I think Ramsay’s global operations and growth of earnings justifies the premium. Having said that, I think Healthscope is trading at slightly better value than Ramsay.

I think both Ramsay and Healthscope are worthy of a place in any Foolish portfolio and would be good long-term buys at today’s prices.

For another stock that has global aspirations like Ramsay and a huge dividend yield of around 8%, you should read this report.

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Motley Fool contributor Tristan Harrison owns shares of HEALTHSCPE DEF SET and Ramsay Health Care Limited. 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.

HOT OFF THE PRESSES: My #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

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