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Leading broker names Ramsay Health Care Limited (ASX:RHC) shares as a sell

Unfortunately for its shareholders, the Ramsay Health Care Limited (ASX: RHC) share price could be spending another day in the red on Monday after it was the subject of a bearish broker note.

According to a note out of Goldman Sachs, the broker has initiated coverage on the private hospital operator with a sell rating and $49.00 price target. This target implies potential downside of over 9% for Ramsay Health Care’s shares.

Why is Goldman Sachs bearish on Ramsay?

Goldman has made the move on the belief that Ramsay’s shares are overvalued, especially given the challenging industry dynamics which are likely to persist through the medium term.

In respect to its valuation, the broker’s sum of the parts analysis estimates that the market has valued Ramsay’s Australian hospitals at a 38% premium to its global peers. Although it acknowledges that a premium is justified given the portfolio’s greater scale and diversification, it doesn’t believe it is deserving of such a premium.

This is partly down to the challenging industry dynamics it faces from rising healthcare costs and the decline in private health insurance (PHI) participation.

Goldman has stated that that the: “decline in PHI participation directly pressures hospital operator utilisation but furthermore, as policyholders seek exclusions to maintain affordability, the value of the remaining policies fall.“

Before adding that: “We believe that regulatory attempts to address affordability through a focus on PHI premium growth risk being counter-productive long-term but certainly dilutive near-term and do not tackle the burgeoning disconnect between Medicare and Private fees which, in our view is a pertinent issue. Remedial policy is challenging to execute and we expect these pressures to persist through the mid-term.”

Because of these challenges Goldman estimates that Ramsay will only be able to grow its earnings at a compound annual growth rate of 4% through to FY 2021.

Should you invest?

Considering Ramsay’s shares are changing hands at approximately 20x estimated forward earnings, I would have to agree with Goldman that they are overvalued.

I’ve been bearish on Ramsay for some time now and this remains the case even after the sizeable drop in its share price.

Should its share price fall to around $45.00 I would be interested in making a patient long-term investment, but until then I see far better risk/rewards on offer from elsewhere in the healthcare sector with shares such as CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH).

Alternatively, these top shares could be even better investment options in FY 2019.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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 Scott Phillips.

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