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2 healthcare stocks that look better value than CSL Limited

Credit: Brogan & Partners

As one of Australia’s biotech stocks with the best track record and most potential, CSL Limited (ASX: CSL) rarely (read: never) trades at a discount. However, there are other healthcare stocks with successful products on the market that can be picked up at a bargain more often than CSL.

I’m talking of course, about Cochlear Limited (ASX: COH) and Sirtex Medical Limited (ASX: SRX).

Cochlear is a hearing device researcher and manufacturer whose potential was masked for a number of years by a device recall and a higher Australian dollar. Despite recent share price rises, Cochlear’s potential is intact with a global market for hearing solutions that is substantially under-penetrated.

New products drive a significant amount of growth, but Cochlear also benefits over the long term with annuity-like sales from its maintenance/service business. The services business now contributes more than 20% of sales revenue, and existing customers can also be introduced to more advanced devices as they become available. Cochlear has a great balance sheet, with $213 million in debt, $80 million in cash, and free cash flow (money left over after dividends and all expenses) of $100 million per year.

Additionally, around 12% of revenue gets spent on Research and Development (R&D), which is investment in future growth. With just 57 million shares on issue, Cochlear is also pretty vulnerable to sharp falls in the event of adverse or even average news, so patient investors can often pick up shares cheaper.

Or…

Smaller than Cochlear and CSL is liver cancer company Sirtex Medical, whose ‘Selective Internal Radiation Therapy’ (SIRT) has considerable potential and is the main money-spinner for the business.

Unlike CSL and Cochlear, Sirtex spends considerably less on R&D – just $4.7 million, or 4% of revenue, however its balance sheet is better with $21 million in cash and zero debt, just some tax liabilities. Like Cochlear, Sirtex also has a significantly under-penetrated market, although its international growth is constrained by the body of research available on the treatment and regulatory approval in foreign markets.

Even so, Sirtex has managed double-digit sales growth for a number of years now. While sales slowed a little this year there are a number of major study results expected in the future which will underpin sales and hopefully open doors to some new markets. There’s also the potential for a takeover bid, with Sirtex’s growth potential and debt-free balance sheet looking quite attractive.

At today’s prices Sirtex looks cheap, and indeed is below the $30 I bought shares at a couple of months ago.

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Motley Fool contributor Sean O'Neill owns shares of Sirtex Medical Limited. 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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