3 healthcare blue chips I’d buy after a market tumble

Over the last 10 years, the S&P/ASX 200 Health Care Index – which tracks the performance of companies in the ASX200 that are involved in the provision of healthcare services and equipment, as well as those that carry out research and development of pharmaceuticals and biotechnology – has delivered an annualised return of a little over 13%, which is more than double the 5% annualised return on the broader S&P/ASX 200 

The great thing about healthcare stocks is that they have both defensive and growth characteristics. Healthcare is generally not considered a luxury item, so these companies should still perform well even in economic downturns.

But breakthroughs in pharmaceuticals or biotechnology can often cause stock prices to rise sharply – so investors in healthcare stocks get a lot of upside potential without too much downside risk. 

Because of the highly differentiated nature of products and services offered by healthcare companies, margins are normally wide. Plus, the high financing costs and specialised knowledge required for research and development means barriers to new entrants are high. 

Australia has a number of world class healthcare providers, and you might be wondering which would be the best addition to your portfolio.  

Ramsay Healthcare Limited (ASX: RHC)

Ramsay Healthcare is one of the top 5 private hospital operators in the world, with 235 medical facilities located across Australia, France, the UK, Italy, Indonesia and Malaysia. It treats over 3 million patients each year, providing services including day surgery, complex surgical procedures, and psychiatric care and rehabilitation. 

Revenue for FY17 was $8.7 billion, with core NPAT $542.7 million, up 12.7% on FY16. It currently trades at a multiple of 29x earnings, with a fully franked dividend yield of 1.95%. 

ResMed Inc. (CHESS) (ASX: RMD)

ResMed specialises in the treatment of sleep apnoea and other chronic respiratory diseases. 

Its share price rose by 14% over the last month to $12.34 on the back of a positive quarterly update. Revenue for the period ending 31 December 2017 was US$601 million, up 13% on the same period in the prior year. Net income for the quarter was impacted by a one-off additional US income tax expense of $119.9 million for unremitted foreign earnings. But non-GAAP income, which is adjusted for this tax and other one-off expenses, was US$143.8 million, up 39% on the prior year period.  

The company could also bring in additional revenues from its new portable oxygen generator which it will launch in the current quarter.  

ResMed stock is cheap relative to its peers. It also offers an unfranked dividend yield of 1%. 

Cochlear Limited (ASX: COH)

Headquartered in Sydney, Cochlear is a global leader in hearing implants. It had a strong FY17, with $1.24 billion in revenues and a record net profit of $224 million, which was an 18% increase on the prior year. Cochlear claims that nearly 1 in 3 people over the age of 65 suffer from a hearing impairment, but global market penetration for hearing implants is still only 5%. Combine that with an ageing population in many regions of the globe, and this could mean there is still plenty of growth potential for the company in the longer term.   

Cochlear does seem the most expensive of these three big blue chip healthcare providers, perhaps because of its perceived potential for growth. It trades at a multiple of 45x earnings, with a fully franked dividend yield of 1.54%. 

Foolish takeaway

Any one of these three companies would be an ideal addition to a diversified portfolio. Each company is a global leader in its field, and none are in direct competition with one another. 

However, I would say that at current prices ResMed seems to offer the best value – and with its new product launching this quarter the company could see a welcome boost in its revenues. 

Top 3 ASX Blue Chips To Buy In 2018

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Motley Fool contributor Rhys Brock owns shares of Cochlear Ltd. and Ramsay Health Care Limited. The Motley Fool Australia has recommended Cochlear Ltd., Ramsay Health Care Limited, and ResMed Inc. 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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