The healthcare sector is considered one of the most recession-proof industries on the ASX. However, it isn't government proof.
The government recently tried to reduce the costs of a range of different pathology services, which is the majority of what Sonic Healthcare Limited (ASX: SHL) and Primary Health Care Limited (ASX: PRY) do.
Sonic has a market capitalisation of $8.5 billion and Primary has a market capitalisation of $2 billion.
Sonic is a much larger business because it has international operations in a number of countries including the USA, Germany and Switzerland. Around 59% of Sonic's revenue comes from overseas. This gives Sonic an upper hand over Primary as the geographical diversification of its earnings (theoretically) makes it a safer investment.
Primary offers more than just pathology too and has started offering bulk-billed IVF services. This is a great service for people who can't afford the full cost service from Monash IVF Group Ltd (ASX: MVF) and Virtus Health Ltd (ASX: VRT).
Dividend yield
Both Sonic and Primary offer a decent dividend yield, Sonic has a grossed up dividend yield of 5.31% and Primary has a grossed up dividend yield of 4.63%. These yields are nicer than the term deposit rates currently on offer.
Valuation
Sonic is currently trading at 17.9x FY16's earnings, which is lower than the sector's price/earnings ratio of 19.5x. It's expected to grow earnings per share by 3% in FY17 (source: Commsec). This suggests it's trading at 17.6x FY17's estimated earnings.
Primary has a price/earnings ratio of 39x, which is a lot more than Sonic and the sector as a whole. It's expected to grow earnings per share to 21.5 cents in FY17. This means it's currently trading at 17x FY17's estimated earnings.
Is it time to buy?
Healthscope Ltd (ASX: HSO) recently disclosed that it hasn't seen increased activity during the first quarter. That update also affected Ramsay Health Care Limited's (ASX: RHC) share price, but Ramsay reaffirmed its original guidance for the year.
So far neither Primary nor Sonic have indicated fewer numbers have been coming through the doors. Currently, I think the biggest threat to future results is the government's aim to bring down costs.
I don't think either of these businesses are trading at great value. Primary could have been a good buy in December 2015 when its share price dropped down to $2.26. At the current prices, I'd choose Sonic over Primary for its diverse international earnings.
For now I think it would be best for Foolish investors to wait on the sidelines until there is talk of the government trying to reduce costs again.
