Why I think Ramsay Health Care Limited is an outstanding buy

Credit: Keoni Cabral

The last 12 months have been kind to shareholders of Ramsay Health Care Limited (ASX: RHC). The health care service provider has been one of the better performers on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), providing investors with a market-beating return in the region of 21%.

Although the shares have climbed strongly and are now changing hands at 30x estimated FY 2016 earnings, I wouldn’t reach for the sell button just yet.

Ramsay Health Care has a track record of providing strong returns for its shareholders over almost any timeframe you look at. Looking back over the last 5 and 10 years its shares have provided an average annual total shareholder return of 34.8%. and 25.6%, respectively.

There really aren’t many shares on the Australian Stock Exchange which can claim to have done that. But that was then, what about now you’re probably thinking. Well the good news is that I believe the company is positioned perfectly to continue to grow its earnings at a very strong rate and provide market-beating returns for its shareholders.

According to management, there is increasingly strong demand for its services across the world. This demand has been brought on by ageing populations, longer life expectancy, increased chronic disease burden, population growth, and improvements in treatments and diagnostic methods.

Thanks to its 221 hospitals across six countries, 25,000 beds, and 50 years’ experience in the industry, I feel very confident Ramsay Health Care will capture this increasing demand.

So far this appears to be the case. In its half-year results for the period ending December 31 2015, the company produced revenue growth of 24.9% year-on-year to $4.2 billion. It was a similar story on the bottom line too, with earnings per share jumping 16.9% to 114.1 cents.

In order to maintain this strong growth there are a number of options available to Ramsay Health Care. The company has strong operating cash flow and a robust balance sheet with the financial flexibility needed to fund further acquisitions and its pipeline of brownfield capacity expansion. This pipeline has been estimated by management to be around 400 beds and 12 additional theatres.

In the future I believe that expansion into China will be an option. Recently, the company unceremoniously pulled out of a joint venture in the city of Chengdu with Chinese company Jinxin. In a market release short on detail, it explained that certain conditions of the joint venture had not been met.

This was most probably a wise decision. Any move into a new market needs to be planned expertly. If conditions are not being met then persevering could lead to a very expensive mistake. Expensive mistakes can be detrimental for a company’s share price. You only need to look at Woolworths Limited (ASX: WOW) and its Masters debacle to see how quickly things can turn sour for shareholders.

I have little doubt we will see Ramsay Health Care in China eventually. It has previously cited China’s estimated 98 million diabetics as a market it feels it can help with. If it does, then I believe this outstanding company could continue its fantastic growth for the next decade. Making it a better investment than rival Healthscope Ltd (ASX: HSO) as far as I’m concerned.

Although I am bullish on the company, it is worth remembering that any unexpected slowdown in its growth could impact the price the market is willing to pay for the shares. I believe it is best to be prudent and keep this in mind before making an investment.

Ramsay Health Care is definitely one of the best shares on the ASX, in my opinion. But it doesn't pay a strong dividend unfortunately. If you're looking for dividends then I would highly recommend having a read about these five fantastic dividend shares. Each pays a solid dividend and I think they could provide share price gains on top of it.

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Motley Fool contributor James Mickleboro 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. I contribute to The Motley Fool as a freelance writer and the thoughts and opinions in this post are my own, not that of The Motley Fool’s.

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