There is essentially just one thing that separates private hospital providers Healthscope Ltd (ASX: HSO) and Ramsay Health Care Limited (ASX: RHC). Size.
Established Giant v Growing Rival
The standout factor between the two is Ramsay's $10 billion market cap versus just $2 billion for Healthscope. It's a fair point that size isn't everything but I believe that in the healthcare sector size can make a pretty big difference!
Hospital Numbers
Ramsay has nearly 230 hospitals spread across five countries that serve over 1.5 million patients per year in 25,800 beds. It has hospitals in Australia, the UK, France, Indonesia and Malaysia. This diversifies earnings and gives Ramsay a huge presence in these major countries.
For comparison; Healthscope currently operates a (still quite respectable) 44 hospitals in Australia, New Zealand, Malaysia, Singapore and Vietnam. The company is Australia's second-largest private hospital group at over 4,400 beds. The group has hospitals in all states but over three-quarters of the available beds are found in Australia's most populous states of Victoria, Queensland and New South Wales, and the majority of earnings come from Australia.
Profit and Growth
Healthscope has just come out of private equity ownership for the last four years so we can only rely on the prospectus forecasts. At the current price, investors are buying at a forward price-to-earnings ratio of around 22, compared with around 25 for Ramsay.
I believe, as with some other writers, that this Ramsay premium will remain in place over the medium term. Questions remain about the levels of cost-cutting performed during private equity ownership, which may have resulted in under-investment in facilities.
In terms of growth, both companies present opportunities, Ramsay primarily through acquisitions and Healthcope through its range of ongoing build and expansion projects.
Long-term View
Investors with a Foolish attitude will appreciate the years of excellent shareholder returns from Ramsay. Prior to being bought by private equity, Healthscope had a similar track record and could well turn out to be an excellent buy at current prices.
Importantly however, both companies will be major beneficiaries of the aging Australian population over the next 10 to 20 years. An increase in private health cover and greater focus on preventative medicine should flow through to greater revenue for top private operators like Ramsay and Healthscope.
