The Healthscope Ltd (ASX: HSO) share price is a good long-term buy in my opinion, here's why.
Healthscope is the second largest private hospital operator in Australia, Ramsay Health Care Limited (ASX: RHC) is its only rival that's bigger.
Here are five reasons why I think Healthscope is a good buy:
Hospitals have defensive earnings
Healthcare is one of the best industries in my opinion because of how defensive its earnings are. Illness doesn't really follow economic patterns. The need for an operation doesn't track the boom and bust cycle. Demand for healthcare is fairly consistent year to year.
Hospitals are a great way to get exposure because patients with a variety of health issues need to go to hospitals. Patients go to a hospital whether it's giving birth, a knee operation, or an accident at home. Hospitals aren't reliant on earnings from one health issue like Cochlear Limited (ASX: COH) or Nanosonics Ltd (ASX: NAN) where a competitor could take most of the customers.
Local monopoly
One of Warren Buffet's favourite things to look for in a business is if it has a strong economic moat.
Once a hospital is built it's very unlikely that the government would approve another hospital to be built close by. This gives each hospital somewhat of a monopoly over the local area.
Ageing tailwinds
The population of Australia is steadily ageing as the baby boomer generation starts to hit retirement age.
The over-65 age bracket is the group most likely to need to use a hospital, therefore Healthscope has a clear tailwind of more potential patients as the years go by. Over the next two decades the number of over-65s is expected to increase by 75%.
Healthscope's expansion plans
Healthscope management really want to take advantage of all the additional future patients. That's why Healthscope is on track to add 792 hospital beds and 49 operating theatres by the end of FY19.
The additions will add a significant amount of revenue and profit to the business. It will also reduce how much is being spent on construction costs, which will also provide a boost to the profit.
Valuation
Healthscope is not particularly cheap compared to some companies on the ASX as it trades at 18x FY18's estimated earnings. However, it's a lot cheaper than Ramsay which is trading at 24x FY18's estimated earnings.
They are both exposed to the same tailwinds and Healthscope could do just as well as Ramsay over the next decade in Australia (if not better).
Risks
Healthscope is increasing its debt to fund all of the expansion planned. Debt isn't great, but over the long-term I think that's a better option than permanently diluting shareholders. Its net debt was sitting at a fairly manageable 3.42x the last twelve months of earnings before interest, tax, depreciation and amortisation.
Healthscope will have to play its part in keeping private health affordable for the system to work. Private health insurance policyholders need to be kept on board or else it will become more and more expensive for the remaining people.
Foolish takeaway
As I mentioned above, Healthscope is trading at 18x FY18's estimated earnings and has a trailing unfranked dividend yield of 3.51%. When it starts to frank its dividend the income potential will increase. I think this is a very reasonable price to pay for exposure to a strong tailwind for many years ahead.