3 ASX healthcare shares with global earnings power

Credit: Unsplash

Identifying good-quality businesses, with strong earnings streams and credible expansion options for the future takes a large amount of investing skill, but there is one thing that is outside the control of investors that is crucial for success: the current price of shares.

Filling your portfolio with fantastic businesses isn’t likely to lose you a lot of money, but your ability to earn outsized returns comes from the ability to buy these businesses when the price is lower than it should be.

Unfortunately, until recent times, most stocks were overvalued, and the healthcare sector home to the best (or worst, depending on how you look at it) examples of businesses that were high quality, but just a little on the expensive side.

The diabolical start to 2016 for the share market as a whole gives us a chance to look at three candidates that combine the powerful themes of healthcare and international earnings power. They may also be cheap when you look at their future earnings prospects.

Sonic Healthcare Limited (ASX: SHL) is one of the largest pathology lab operators and laboratory managers in the country. Its major point of difference over its local rivals is its international operations, which allow it to benefit from a falling Australian dollar.

However, Sonic’s share price is over 20% below its 52-week high. The reason for this is largely due to the ongoing news flow around the Federal government seeking to limit the cost of administering the health system, with major reforms likely in the May budget. The market hates uncertainty, and has marked down shares accordingly. But with an aging population, and secular demand for diagnostic testing rising across all of the markets in which it operates due to this factor, it is likely the demand drivers for Sonic will remain strong over the next few decades.

On the other hand, Cochlear Limited (ASX: COH) is exactly the kind of company the new innovation-championing government would like to replicate dozens of times over.

Cochlear is a global titan in the hearing implantable device market, and if you ever want a feel good moment, get on YouTube and watch the videos of kids having their Cochlear ear implants turned on for the first time and look at the wonder on their faces.

Cochlear announced an incredibly well-received earnings update this earnings season, with the stock responding by climbing over 15% in the space of a week. Net profit was up 32% to $94 million, while the company also announced an upgrade to full year profit expectations.

The falling Australian dollar is a major boon for the company, with sales made overseas having a multiplier effect on earnings. The market opportunity for Cochlear remains huge. Estimates of the number of people with hearing loss that can be corrected is around 360 million, and it is estimated that only 5% have access to a corrective device. As populations urbanise, and become wealthier, particularly in South East Asia and China, demand for health products such as Cochlear’s will grow, providing a pathway for future growth.

However, regulatory recalls like the one that affected the company several years ago could hamper this outlook, as could concerns about the protection of valuable company intellectual property in developing markets. While this stock is not “cheap” relative to recent prices, the competitive advantage of Cochlear is arguably greater than most businesses on the ASX, with a multitude of patent-protected intellectual products and a growing international market to target for future expansion.

Ramsay Health Care Limited (ASX: RHC) is the undisputed leader in private hospital operation and management in Australia. However, a smart international strategy has seen Ramsay grow its revenue base overseas, to the point where it now earns around 50% of its income internationally, with the majority coming from France and Britain.

While companies that make acquisitions are sometimes regarded with suspicion due to the perception they are “buying” growth, rather than generating it organically, Ramsay could be an exception. Put simply, the economics of hospitals mean that to serve more patients, more beds are needed, and there is a finite number that can be added to existing sites.

Therefore, growth by acquisition becomes necessary, and Ramsay has shown over decades that it has built up substantial internal knowledge in how to purchase, streamline and refine hospitals operations. The shares are over 12% down from recent highs. Risks to Ramsay include execution risk in integrating future acquisitions, as well as regulatory risk around private health insurance and health spending in the nations where it operates.

Healthcare is one area to earn strong returns, but if you're after a potentially incredible growth stock then read on...

Dollar for dollar, insiders are calling it one of the biggest new markets in the history of modern business... NOW is the time to get in on the hush-hush industry that could be poised for growth of over 4,463%+ by 2020... And the 1 ASX stock that stands to grow YOUR money right alongside it! Simply click here to learn its name.

Motley Fool contributor Ry Padarath has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.