Is Sonic Healthcare Limited a buy at this share price?

When it comes to investing in the healthcare sector there are a handful of companies which enjoy ‘market darling’ status.

Amongst these high quality but richly priced stocks are Ramsay Health Care Limited (ASX: RHC) and CSL Limited (ASX: CSL).

There is little argument that these businesses own some appealing assets. The problem for investors who demand a margin of safety in their purchase price is that these stocks trade at levels which leave very little room for anything but perfection.

Enter Sonic Healthcare Limited (ASX: SHL).

Sonic is a much smaller company than either Ramsay or CSL, with a market capitalisation of $7.6 billion.

From a price compared to value point-of-view however, it is arguably more appealing…

The group is a provider of medical diagnostic services – a market segment in which it competes with the likes of Primary Health Care Limited (ASX: PRY) and Healthscope Ltd (ASX: HSO).

Unlike Primary and Healthscope however, Sonic boasts major overseas operations (particularly the USA and Germany) which contribute over half of the total revenues to the group.

This is currently providing an earnings tailwind thanks to the weaker Australian dollar while also providing important diversification of regulatory risks too.

At the interim financial results presentation in February, management provided guidance for earnings before interest, tax, depreciation and amortisation (EBITDA) growth of over 25% to a range between $870 million to $900 million at current exchange rates.

At the earnings per share (EPS) level, one analyst consensus suggests EPS should rise from 86.6 cents per share (cps) in FY 2015 to 106.9 cps in FY 2016. (Source: CommSec)

With the share price slipping around 10% in the past 12 months – that’s slightly less than the 15% decline in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) – the stock is trading on a forecast price-to-earnings ratio of 17.2 times.

While investors should be mindful of the lower franking of Sonic’s earnings, this is arguably still an attractive multiple to acquire a high quality, defensive business on.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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.

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