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This week’s top growth buy: Sonic Healthcare Limited

Finding stocks with enticing growth profiles isn’t all that difficult. Companies such as REA Group Limited (ASX: REA) and Carsales.com Limited (ASX: CRZ) are undoubtedly experiencing strong growth which looks set to continue. Rather, the problem is finding growth stocks that are selling at enticing prices. In this respect Sonic Healthcare Limited (ASX: SHL) looks to fit the bill.

Background

Sonic specialises in providing medical diagnostic services such as pathology and radiography to patients across Australia, New Zealand, USA, UK, Germany, Switzerland, Belgium and Ireland. The company currently employs around 26,000 staff and in the half year ending December reported revenue of $1.9 billion and after tax earnings of $177 million.

Unlike some businesses which rely on acquisitions to grow but ultimately fail to create shareholder value, historically Sonic’s acquisitive business model has proven successful. This company’s success at growing earnings per share has in turn resulted in share price appreciation which has outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO). Over the past decade Sonic’s shares have risen 115%, compared with a 56% rise in the index.

Growth Potential

Admittedly, Sonic’s recent interim results did enjoy the tailwind of a weaker Australian dollar. On a constant currency basis, growth in revenue and earnings were a more muted 4.4% and 9.6% respectively – as opposed to the strong 11.9% and 17.7% on a statutory basis.

This is however one of the added benefits of investing in Sonic, namely, the exposure the stock provides to offshore earnings and the potential to benefit from further weakening of the Australian dollar.

As Ramsay Health Care Limited (ASX: RHC) and Primary Health Care Limited (ASX: PRY) have also shown the ability to make synergistic, accretive acquisitions does provide a compelling case for further growth. Sonic’s keen focus on taking costs out of its business units (including $60 million in costs out of the USA division) and re-investment in those units to drive organic growth suggests growth should continue at a reasonable rate at Sonic through both organic and inorganic means.

Valuation

Management reaffirmed guidance for the full year of “EBITDA growth of approximately 5%”. This growth refers to constant currency and at current exchange rates equates to approximately 14% growth in EBITDA. With interim earnings of 44 cents per share (cps) and analyst consensus (from Morningstar) for full year earnings of 97.5 cps, this suggests a FY 2014 price-to-earnings (PE) multiple of 17.7x.

Foolish takeaway

Having paid an interim dividend of 27 cps and with the analyst consensus expecting a 41 cps final dividend, the stock is trading on a partly franked dividend yield of 3.9%.

Sonic is unlikely to grow as quickly as it has in the past, however at 17.7 times earnings, this well-managed, global business looks reasonably priced for long-term investors.

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Motley Fool contributor Tim McArthur owns shares in Primary Health Care Ltd.

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