The Motley Fool

Ramsay Health Care vs. Primary Health Care

Two of the most successful Australian companies in the health care sector are Ramsay Health Care (ASX: RHC) and Primary Health Care (ASX: PRY). Both companies benefit from the guidance of their founders. Ramsay Health Care was established by the current chairman Paul Ramsay. The CEO of Primary Health Care is Dr Edmund Bateman, a founding member of the board.

The global ambitions of Ramsay Health Care are on display with the recent acquisition of Medipsy, a French psychiatric hospital group, for consideration of just under 150 million Euros. With the addition of Medipsy, Ramsay’s French subsidiary, Ramsay Santé will have a total of 40 facilities, making it the third largest hospital operator in that country by number of facilities.

Certainly, the company has proved that its expertise facilitates expansion into new jurisdictions. This is exciting because it means there is plenty of room to grow operations, despite the large market capitalisation of over $7 billion. One factor at play is the aging of populations in developed nations. This should ensure strong demand for Ramsay’s hospitals and day surgeries, which are spread across Australia, the United Kingdom, France and Asia. The company expects earnings per share to be at least $1.53 in FY 2014, which implies a forward P/E ratio of about 26.

Primary Health Care will also benefit from this trend, although its operations are based in Australia. The company combines a number of businesses, including GP medical centres, full radiology and pathology services, ancillary healthcare professionals, and specialists. However, the best businesses are the 58 medical centres, which offer the full range of services. This segment achieved a profit margin of almost 50% in FY 2013.

I also like Primary’s pathology business, because although the margins are lower, the company has more than 1,500 licensed pathology collection centres throughout Australia. This network means that only a small fraction of the pathology revenues are sourced from Primary’s medical centres. Shareholders can be proud that their company received feedback that it delivered savings of up to 50% to public hospitals using its pathology services.

Earnings per share are expected to be at least 32c in FY 2014, putting the company on a forward PE of about 15. Although this may look attractive, Primary Health Care has over $1 billion in debt, and earns fairly low returns on invested capital. Although Ramsay Health also has over $1 billion in debt, it is a much larger company and can cover the interest on that debt more easily than can Primary. Ramsay also earns consistently higher returns on invested capital.

Foolish takeaway

Ramsay Health Care is more expensive relative to Primary Health Care for good reason: it is the higher quality business. Although I find both companies too expensive at current prices, the guidance of strong management and its exposure to aging populations mean that they both deserve a spot on your watchlist.

NEW. The Motley Fool AU Releases Five Cheap and Good Stocks to Buy for 2020 and beyond!….

Our experts here at The Motley Fool Australia have just released a fantastic report, detailing 5 dirt cheap shares that you can buy in 2020.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading over 40% off it's high, all while offering a fully franked dividend yield over 3%...

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click here or the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!

Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article.