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Why Monash IVF Group Ltd and Virtus Health Ltd could be strong buys

The medical advancements made by doctors and scientists each year are impressive to me.

One of the most advanced areas of medical development is medically-assisted reproduction techniques such as IVF. Monash IVF Group Ltd (ASX: MVF) and Virtus Health Ltd (ASX: VRT) are the two big IVF players on the ASX.

It’s important to remember that just because a business has leading-edge technology doesn’t mean it’s a buy. It has to be a sound investment too.

Here are some reasons why Virtus and Monash IVF could be strong buys for the medium-term:

Big dividends

Assisting couples with IVF is a very profitable enterprise. That’s why Monash IVF and Virtus are able to pay out a lot of that profit as big dividends.

Dividends can form a major part of total shareholder returns which is why they shouldn’t be overlooked.

Monash IVF has a grossed-up dividend yield of 7.69% and Virtus has a grossed-up dividend yield of 7.03%.

Growth of potential patients

Various factors such as our diet and lifestyle are causing western country populations like Australia to have lower fertility. Combine that with the trend for families to leave having kids until they’re older means that having children is harder.

This combination of factors means that Monash IVF and Virtus have a growing pool of potential patients which should help future revenue and profit growth.

International expansion

Most of Virtus’ and Monash IVF’s revenue comes from Australia but both businesses are actually expanding to other countries. Monash IVF has operations in Malaysia and Virtus has operations in Ireland, Denmark and Singapore.

Generating more revenue from overseas is good for diversification and reduces the risk if one particular country has troubles.

Risks

The biggest short-term risk to Virtus and Monash IVF is the bulk-billed IVF service offered by Primary Health Care Limited (ASX: PRY). This could steal away potential patients.

The longer-term risk is that a new treatment is developed. A new treatment could be cheaper or better and they lose revenue or patients.

Foolish takeaway

Monash IVF is currently trading at 11x FY18’s estimated earnings and Virtus is trading at 12x FY18’s estimated earnings. It’s hard to pick between them so the best strategy may be to buy both.

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Motley Fool contributor Tristan Harrison 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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