This is why I would buy Sonic Healthcare today

Last Friday Sonic Healthcare (ASX: SHL) provided a market update for Sonic Healthcare USA. It appears that its recent share price fall is a result of investors inappropriately extrapolating recently released earnings expectations of two of its US competitors.

The company reaffirmed its earnings guidance for FY 2014 and revealed substantial earnings growth in its US business for the five months to 30 November. Furthermore, it expects to continue to do so for the full 2014 and 2015 financial years.

Sonic is an international medical diagnostics company, offering laboratory medicine, pathology and radiology services to the medical community. The company derives 49% of its revenue from overseas of which North America comprises 21%.

Its main competitor is Primary Health Care (ASX: PRY), which is engaged in providing pathology and diagnostic services and also the provision of general practice services through its operation of medical centres. However, it lacks geographical diversification with 100% of earnings deriving from Australia. By comparison, Morningstar states that Sonic’s U.S. division will continue to gain scale and profitability, benefiting from its global sourcing scale. They expect steady realisation of synergies in the U.S. and European markets to gradually boost margins for many years and help drive earnings per share growth of around 10% during the next five years.

Why invest now?

The most recent reporting season in August, revealed upgrades from brokers, due to a US$60 million cost-cutting program in the U.S, above consensus pathology margins and strong medical centre margins. The share price at that time was $15.67 and as a result of the upgrades rose 10% to reach an all-time high of $17.24.

Additionally, I have previously mentioned Sonic in a prior article entitled “4 companies to benefit from a falling Australian dollar”. This alluded to the heady mix of profit upgrades and a falling Australian dollar. In last Friday’s announcement Sonic stated that its U.S. earnings growth will be further enhanced in its results for the current year by the weakened Australian dollar.

Foolish takeaway

In my opinion, it is an opportune time to invest in Sonic Healthcare for investors with a medium and long-term horizon. Opportune because incorrect assumptions have led to share price levels last seen when broker upgrades occurred and a subsequent rally ensued. It should be noted that the risks of further reforms to U.S. Medicare and/or German private rates remain, but they are not expected to affect earnings before FY 2016. 

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Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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