The best healthcare stocks almost always seem ‘expensive’. Companies like RedMed Inc (ASX:RMD), CSL Limited (ASX: CSL) and Ramsay Health Care Limited (ASX: RHC) have such long, reliable histories of strong shareholder returns that investors rarely get opportunities to purchase shares at reasonable prices.
Every now and then however, quality healthcare companies present an opportunity for long-term investors to dive in. A share price dip may be caused by either slightly disappointing results, such as those seen recently by ResMed, or the market underestimating the long-term potential of the company.
Sticking with RedMed for now though; the company’s share price has fallen from a three-year high of $5.87 in October last year to now trade at $4.90. The fall has been primarily due to a disappointing earnings result for the three months to 31 December, where US revenue dropped by 2% due to increased competition and changes to the US Medicare system. This should prove to be a minor blip and a buying opportunity as earnings are still expected to rise by 20% in the 12 months to June 30, putting the ever-reliable ResMed on a price-to-earnings ratio of around 18.5. This may seem high but CSL and Ramsay trade well above 25.
Another company on a price-to-earnings (PE) ratio around 18 is Ansell Limited (ASX: ANN). Well, it’s on a trailing PE of 18, but a forward PE of only 14. This is a company that has been able to grow net profit in all but two of the past 10 years and has consistently delivered a return on equity above 16%. Morningstar expects earning per share to increase by 16% this year, and another 15% next year, which should prompt some solid share price growth.
The final healthcare stock that I believe looks cheap is Sonic Healthcare Limited (ASX: SHL). As well as boasting a decent 4% dividend yield, Sonic is forecast to grow earnings by 14% this year and is trading on a forward PE ratio of around 17. I like Sonic for its exposure to Europe and the US, which it has acquired through a range of seemingly well-priced purchases. The next couple of years will be a period of consolidation before it either continues expanding or becomes a serious dividend machine.
Healthcare companies have a great track record of strong shareholder returns. Investors should always keep an eye out for dips in the share price of healthcare stocks, as the big names are almost always great investments over the long term (just ask CSL shareholders who have seen the share price rocket from $4 to $71 in only ten years!).
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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned.