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Keep Sonic under the microscope

Sonic Healthcare (ASX: SHL) is a company worth keeping an eye out for as a buying opportunity. Despite its share price being rather buoyant in the past month, it’s bounced around enough recently to suggest there could be a good time to get on board. And there’s every reason to believe in its long-term future.

Sonic was resonating well along with other healthcare and biotech stocks in the heady days before 2008, but it’s only now retouching the highs revisited just once since then. On May 15 it made a 52-week high of $14.94 before a couple of retreats down to $14.11 yesterday — around the low- to mid-$13.00s, Sonic will look a more solid prospect.

Optimism for it as a worthy contender for your portfolio can be based on a number of factors: first, it’s a mature defensive stock in growing sector; second, it earns about half its income from overseas, so it is well exposed to further falls in the Aussie dollar. Both in Europe and the United States the company aims for cost and service rationalisation with bolt-on acquistions.

However, developments at home may be just as good a reason to think Sonic can do well: the prospective change in government will increase calls to save costs with greater outsourcing of public pathology services; and there will be increased pressure to support companies earning overseas incomes, perhaps with taxation incentives like perhaps changing franking rules.

Responding to a call for just that from ANZ (ASX: NAB) chief executive Mike Smith, Sonic finance director Chris Wilks recently intimated it had little to do with the company’s reduction in credits from 100% to 45%. And he added that franking may be reduced even further.

Wilks quite correctly said such considerations shouldn’t drive strategy or impede offshore expansion. But if a change like that did happen to occur … it wouldn’t be exactly unwelcome either.

Foolish takeaway

Sonic Healthcare still looks overpriced at recent quotes. Morningside has an intrinsic value of $13 on it and being able to get it at anything near that price would seem to offer a lot of upside. Notwithstahding untoward news, it seems a good stock to buy on short-term price weakness.

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More reading

Motley Fool contributor Andrew Ballard does not own shares in any company mentioned. 

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