Like most developed countries, Australia's population is ageing due to lower birth rates and an increase in life expectancy.
Proportionally, we are going to have fewer children aged below 15 and more adults aged 65 and above. Over the next decade this trend will accelerate rapidly as the populous baby boomer generation joins the age 65 cohort.
One sector poised to benefit from an ageing demographic are private hospital operators like Ramsay Health Care Limited (ASX: RHC) and Healthscope Ltd (ASX: HSO).
These days, already 40% of all hospitalisations in Australia are into private hospitals, and rising health care costs alongside limited funding of the public health care system will likely see this percentage increase over the coming years.
Both trends, the ageing population and the privatisation of healthcare make for strong sector fundamentals and should support positive long term returns for Ramsay and Healthscope.
Let's take a closer look at the two companies:
Ramsay is one of the top five private hospital operators in the world with a market capitalisation of $13.8bn. It is a market leader in Australia and France, with a presence in the UK, Indonesia and Malaysia.
Ramsay has been successful at leveraging its international exposure by allocating capital to the highest margin operations. Its excellent recent performance is also reflected in the share price which is trading at a 31.8x price to earnings per share and 7x price to book value.
At the moment this is little too rich for me, but I think it's definitely worth keeping an eye out for a dip in Ramsay's share price and to then re-evaluate if it becomes a buying opportunity.
Australia's number two private hospital operator Healthscope has a market capitalisation of $3.5bn. Although it only runs domestic hospitals and medical centres, it also has a few international pathology centres in New Zealand, Malaysia, Singapore and Vietnam, which make up around 17% of its operating profits.
Healthscope's financial performance has been a bit volatile recently as margins fluctuate substantially, while large projects such as the Northern Beaches Hospital are in the process of being completed. Currently the stock is going through a bit of a slump, trading at a 18.3x its price to earnings per share and only 1.5x price to book value.
For the long term investor, now may be a good time to buy.
Foolish takeaway
The Australian private hospital sector has strong fundamentals for growth and its major operators Ramsay and Healtscope are quasi-oligopolies with a wide moat and high barriers of entry. While Ramsay currently appears expensive to me, Healthscope looks like a good buying opportunity for the long-term investor.
