Hospital operator and one of the blue chip superstars of the market Ramsay Health Care Limited (ASX: RHC) has tumbled this morning while the sector is rallying. Is the stock's golden run over?
Shares in Ramsay tanked 2.2% to $64.57, even as the S&P/ASX 200 Health Care Index is up 1%.
Ramsay has run well ahead of other health care stocks since the start of the year, and even with today's decline, it is still producing a 5.4% return above perennial favorite CSL Limited (ASX: CSL).
That's enough to prompt Morgan Stanley to downgrade the stock to "underweight" from "equal weight" as the broker warns of an approaching de-rating of the stock.
The downgrade is probably the cause of Ramsay's fall from grace today with the broker warning that hospital margins will come under pressure because the strong margins in the sector have come at the expense of private health insurers' margins that are determined by "rising lapse rates".
What this means is that current conditions are not sustainable and that the number of insurance policies lapsing will translate to lower hospital visits.
But the devil is in the detail and the jury is still out on this outcome. I don't think Australians are giving up private health insurance. In fact, the March quarter statistics show that the percentage of the population covered by private health insurance is holding steady at 47%.
Given the growing population, the insurance market is growing, albeit modestly.
What is probably happening is a greater number of people are opting for basic cover that comes without the bells and whistles because of the lack of job security.
This could still imply some downward pressure on slowing demand for elective surgeries but I don't think it is a given that a "de-rating" in the sector is imminent.
I'd be the first to admit that the stock is looking anything but cheap as it is on a 2014-15 consensus price-earnings (P/E) multiple of 32.4x, but I believe Ramsay can deliver robust double-digit growth in earnings per share (EPS) for the current and next financial years thanks in part to its offshore acquisitions.
It is well within the realms of probability that Ramsay's share price could remain under pressure over the short-term and fall back towards the $60 mark, but any notable dip in the stock should be seen as a buying opportunity.
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