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Are the private hospital operators buys or sells today?

The share prices of Ramsay Health Care Limited (ASX: RHC) and Healthscope Ltd (ASX: HSO) have struggled, with Ramsay essentially flat over three years and Healthscope substantially down.

Some investors may be questioning why this is the case when the ASX share market has risen, particularly health giants like CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH).

So, what’s been happening?

They operate in the same industry but their problems are somewhat different.

Healthscope has struggled to generate organic profit growth at its Australian hospitals and is having to sell off non-core operations to fund its extensive expansion plans.

Ramsay is doing very well in Australia, but has recently said that investors shouldn’t expect much growth from its UK or France operations in the near future.

It also doesn’t help that interest rates are rising. Bond-like stocks supposedly have been hurt, and will be hurt, more because investors viewed them as alternatives to cash. As cash and bonds get more attractive investors theoretically sell those stocks to go back to cash.

Another problem is that a lot of a private hospital’s patients choose to go there because they have private health insurance. There has been a lot of commentary surrounding private health insurance affordability in recent years, which has a direct knock-on effect to private hospitals.

Are they buys?

The ageing demographic tailwind hasn’t changed, that is still in favour of Ramsay and Healthscope.

Ramsay has a wonderful habit of increasing its profit and dividend every year, meaning that its value is getting better every six months on a price/earnings basis. I’d say Ramsay is a good long-term buy at today’s price, but the price could go lower during 2018. It’s currently trading at 23x FY18’s estimated earnings.

Healthscope is harder to judge because it isn’t generating consistent profit. I’d want to see the business is generating good organic growth before committing to buying at the current share price. It’s currently trading at 19x FY18’s estimated earnings.

I wouldn’t buy Healthscope today, but I would buy these top stocks.

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Motley Fool contributor Tristan Harrison owns shares of HEALTHSCPE DEF SET and Ramsay Health Care Limited. The Motley Fool Australia has recommended Cochlear Ltd. and Ramsay Health Care Limited. 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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