3 reasons Ramsay Health Care Limited shares could still be a buy

Credit: loctran7811

It’s been a great year for shareholders in leading private hospital operator Ramsay Health Care Limited (ASX: RHC), with the stock price rallying 18% since the beginning of January.

In comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has returned just 3% calendar year to date.

There is really very little dispute amongst investors that Ramsay is a high-quality business and one that many investors would happily own.

Qualitative factors aside however, there is a dispute over whether Ramsay’s shares represent good value at present or not.

With the stock trading on a trailing price-to-earnings (PE) ratio of 35 times, many investors (myself included) are hesitant to consider the stock a “buy”.

The Bull Case

An important aspect to investing is trying to understand the alternative view point, as this can help identify flaws in your investment thesis.

Here are three reasons why Ramsay’s shares could be in the buy zone today.

PEG Ratio

Wikipedia’s explanation of the price-to-earnings to growth (PEG) ratio is:

“A valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company’s expected growth.”

Based on an earnings forecast for growth in financial year (FY) 2017 of 12.4% and a forward PE ratio of approximately 31 times, Ramsay has a PEG ratio of 2.5.

That’s well above what many investors would consider the “sweet spot”. However growth investors may quite reasonably consider a PEG of 2.5 to be attractive.

Revenue Growth

It’s hard to grow your profits if your revenues aren’t growing. That’s a problem faced by many large companies right now that are battling stalling revenues.

For example, Telstra Corporation Ltd (ASX: TLS) is forecast to grow revenue by less than 1% this financial year.

There are multiple reasons for this low growth forecast including strong competition from peers such as TPG Telecom Ltd (ASX: TPM), Telstra’s already dominant domestic position and a lack of offshore expansion opportunities.

In contrast, thanks primarily to offshore expansion opportunities, Ramsay’s forecast revenue growth for the current financial year is a healthy 6.4%.


Ramsay is obviously a business with many opportunities for growth. This outlook means shareholders are better served by seeing earnings reinvested into growing the business, rather than being returned as dividends.

The pay-out ratio over the past decade has been in the low 50% range. However, as the company matures and growth opportunities slow, there is scope for a meaningful rise in dividend payments.

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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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