In this series of articles, I am taking a look at the history of some of the ASX's best performing stocks. In particular, I hope to address the following questions.
- What did these companies look like at the start of their rise?
- Is it possible to identify tomorrow's 10 baggers?
Private hospital operator Ramsay Health Care Limited (ASX: RHC) has transformed itself from an $87 million microcap in April 2000 to a $15.5 billion juggernaut today. In the process its share price has risen a staggering 9,400% and so a $10,000 investment back then would now be worth $950,000. The icing on the cake would have been the ever increasing stream of dividends contributing a further $80,000 while you waited.
Back in April 2000, Ramsey had just released its half yearly report. The company was negotiating a tricky period during which it chose to discontinue two developments, the Princess Alexandra Hospital and Berwick Community Hospital. These decisions had an adverse impact on profitability and although revenue rose 35.2% to $162 million in the first half of 2000, net profit after tax (NPAT) was down 33.1% to $2.7 million. The balance sheet also looked stretched relative to earnings as the company had $229.6 million in net debt.
However, the company's established hospitals were performing well with revenue up 12.3% and earnings before interest and tax (EBIT) up 18.7% for the half. At the time the market seems to have ignored this given the company's 30% share price fall from 14 January 2000 to 14 April 2000.
Pulse Health Limited (ASX: PHG) is experiencing a similar situation today with expenses related to recent acquisitions and newly opened hospitals masking the performance of its established operations. Pulse delivered revenue of $34.9 million, up 28.9% on last year for the first half of 2016 but lost money at the NPAT level thanks partly to the ramp-up of its recently opened Gold Coast Surgical Hospital. On an underlying basis, NPAT actually rose 57.5% to $2.9 million.
Like Ramsey's before it, Pulse Health's share price has struggled in recent months. The stock is down 46% in the last year thanks to a combination of tough market conditions, delays to the Gold Coast Hospital reaching profitability and aborted acquisitions.
For both Ramsey in 2000 and Pulse today, reported profits belie the true value of the assets in their respective portfolios and this seems to have escaped the market on both occasions. It is no wonder that Pulse has been the subject of a takeover proposal recently.
Parallels also exist in terms of industry conditions in each case, perhaps also affecting market sentiment then and now. Back in 2000 Ramsey's new hospitals were struggling to reach profitability due to a pricing squeeze by health funds and a similar situation exists today. Shares in medical device distributor Lifehealthcare Group Ltd (ASX: LHC) were sold off earlier this year on fears that the recent Private Health Insurance (PHI) review would lead to lower prices for the company's products.
It is important to point out that that Pulse is unlikely to go on to be as successful as Ramsey for a myriad of possible reasons, many of which are unknowable. In terms of the former, firstly, Pulse today is much smaller than Ramsey was in 2000 as demonstrated by its lower revenue and fixed asset base. Ramsey had $436.5 million in fixed assets at the end of 1999 compared to just $19.2 million for Pulse reflecting the fact that unlike Ramsey, Pulse does not own any of the hospitals under its management.
Another significant difference between Ramsay then and Pulse now is the ownership interests of their boards. In 2000 then chairman Paul Ramsey, who has now sadly passed away, owned 40.2% of Ramsay whereas the combined shareholding of Pulse's directors today is less than 3%.
In truth, there is little chance that Pulse will reach the heights of Ramsey but that doesn't make it a bad investment. Even a fraction of Ramsay performance will reward shareholders handsomely and given recent corporate activity it seems that I am not the only one who sees value in Pulse at current prices.
