The last month has been hugely positive for investors in CSL Limited (ASX: CSL) and Ramsay Health Care Limited (ASX: RHC). Indeed, shares in the two health care stocks have risen by 14% and 8% respectively – far ahead of the ASX's 1% gain. However, there could be more to come and shares in both companies could be worth buying for these three reasons.
Growth potential
Having recently reported sales growth of 8% and EPS growth of 11%, CSL seems to be performing extremely well. Indeed, the medical products company that focuses on viral and bacterial diseases is forecast to maintain its encouraging performance over the next couple of years. For instance, EPS is expected to increase at an annualised rate of 15.3% over the period, which is well ahead of the wider market and shows that CSL remains an impressive growth play.
Similarly, Ramsay reported an increase in underlying profit of 19% in its most recent results. The private hospital operator is expected to continue this momentum over the next couple of years when EPS is forecast to rise at an annualised rate of 17.3%. As with CSL, this shows that there remains high demand for health care services.
An attractive valuation
At first glance, both companies appear to be overpriced. That's because their respective P/E ratios are far in excess of the ASX's current rating of 15.8. For example, CSL has a P/E ratio of 24.7, while Ramsay's P/E ratio is even higher at 30.1.
However, when the two companies' earnings growth potential is taken into account, they start to make much more sense as potential investments. For example, CSL has a price to earnings growth (PEG) ratio of 1.62, while Ramsay's PEG is 1.74. Both of these figures are lower, and therefore more attractive, than the ASX's PEG ratio of 1.77. As a result, it could be argued that both stocks offer good value at their current price levels.
Income potential
Although neither stock offers a particularly attractive yield right now, they both have significant potential in this space. For instance, while CSL currently yields just 1.8% (unfranked) it is expected to raise dividends per share by 14.2% per annum over the next two years and this means shares in the company could yield 2.1% in 2016 (assuming a constant share price).
Meanwhile, it's a similar story at Ramsay, where a yield of 1.7% (fully franked) could hit 2.2% in 2016 (assuming a constant share price). With Aussie interest rates mooted to be heading lower, increasing dividends per share could turn out to be a real asset for investors moving forward.
