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Ramsay Health Care Limited (ASX:RHC) shares sink lower on broker downgrade

One of the worst performers on the local market this morning has been the Ramsay Health Care Limited (ASX: RHC) share price again.

In morning trade the private hospital operator’s shares are down 4% to a two-year low of $57.45.

Why are Ramsay Health Care’s shares sinking lower today?

With no news out of the company, today’s decline is likely to be attributable to a broker note out of Credit Suisse this morning.

According to the note, the broker has downgraded Ramsay Health Care’s shares to an underperform rating from neutral. Furthermore, its analysts have cut the price target on the company’s shares down from $68.60 to a lowly $56.50.

The broker made the move on the back of concerns that Ramsay Health Care would not be immune from the structural slowdown in the private hospital industry.

This has led Credit Suisse to downgrade its long-term growth estimates for the company to 3% organic volume growth and 1.5% price growth. As a result, it has cut its earnings forecasts down to $2.82 per share in FY 2018 and $3.00 in FY 2019.

The broker believes that this slower growth makes its shares overvalued.

Should you invest?

I agree with Credit Suisse on Ramsay Health Care and think that 19x estimated FY 2019 earnings is reasonably pricey for its current growth profile.

And while Ramsay Health Care may have defensive qualities, I don’t see any point in paying a premium for them when they aren’t generating sufficient earnings growth. Especially when you can pick up quicker growing shares at similar prices.

Because of this, I would suggest that investors avoid Ramsay Health Care’s shares until they trade closer to $50.00. I would also skip other shares exposed to the weak private hospital market such as Healthscope Ltd (ASX: HSO), Medibank Private Ltd (ASX: MPL), and NIB Holdings Limited (ASX: NHF).

While Ramsay may be classed as a sell, I think these top shares ought to be classed as strong buys.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended NIB Holdings Limited 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 Scott Phillips.

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