Kick Off: Ramsay Health Care Limited v ResMed Inc.

The final match of healthcare pool between Ramsay Health Care Limited (ASX: RHC) and ResMed Inc. (CHESS) (ASX: RMD) will decide which of the two teams progresses to the knockout stage of the ASX World Cup. Sitting on 3 points to Ramsay’s 2 points, ResMed only needs a draw to secure its spot in the next stage. Ramsay needs to win.

Pre-match commentary and stats

ResMed makes continuous positive airway pressure machines and masks for the treatment of sleep apnoea. The main drivers of demand are increased rates of diagnosis, as well as the ageing population and the obesity epidemic. The company’s share price is up about 11% since I recommended it earlier this year.

Ramsay Health Care owns medical and psychiatric hospitals in Australia and abroad. The company continues to acquire hospitals in France, recently announcing it had acquired control of French hospital group Générale de Santé – which boasts revenues of around $2.45 billion, based on current exchange rates.

Ramsay Health Care ResMed
Market Capitalisation $9.45 billion $7.73 billion
Forecast FY 14 P/E ratio 28.2 21.85
Forecast FY 14 Yield 1.82% fully franked 1.89% unfranked
FY 2013 Cashflow Yield 4.75% 5.35%
Net interest cover 7.41 Net Cash of over $600 million

Notes: Thompson Consensus Forecasts, based on last FY reports.


When it comes to price, ResMed appears to have the edge. Both teams have fairly weak dividend yields, but ResMed has a better cashflow yield and trades on a less demanding forward P/E ratio. I think that Ramsay’s forward P/E of over 28 is very optimistic given that acquiring and running hospitals is a capital intensive business.

With far stronger operating margins and lower expectations built into the price, ResMed breaks the Ramsay defence on multiple occasions.

Before long, the young CEO and striker Mick Farrell slots a goal! 1 – 0 to ResMed!

When play resumes, it’s all about growth and in this regard, Ramsay has the edge. With an ageing population driving demand for hospital beds, Ramsay should grow profits for years to come. Meanwhile, battle scares from qualifying matches against Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) have hampered ResMed’s growth prospects because it now faces some margin pressure.

Ramsay Healthcare scores on growth, bringing the score to 1 – 1!

As the match draws to a close it appears a draw is on the cards because Ramsay forwards simply cannot get past the ResMed defence, admirably lead by founder, chairman and captain Dr Peter Farrell. ResMed’s huge cash hoard comes into play in the closing minutes. The potential for ResMed to spend up big when efficient to do so seems to demoralise Ramsay – a company that carries a fair chunk of debt.

In the closing minute ResMed scores, and the game ends at 2 – 1 to ResMed!

ResMed will therefore finish at the top of the healthcare group – but how will it fare in the knockout stages?

Warren Buffett famously looks for growing companies at attractive prices. Certainly, ResMed has great economics: strong margins, strong growth prospects and good return on investment, but is it up to scratch?. Our report on Buffett style investment can assist your judgement of companies like ResMed.

In any event...  you can do even better than ResMed.

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Motley Fool contributor Claude Walker (@claudedwalker) likes AFL more than soccer, and does not own shares in any of the companies mentioned in this article.

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