Morgan Stanley warns Ramsay Health Care Limited (ASX: RHC) is facing a sell-off

Bargain hunters drawn to Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) following its 25% crash over the past year might want to hold off buying the stock until next month.

The share price of our largest listed hospital operator is at risk of tumbling when it releases its profit results later this month, according to Morgan Stanley.

This hasn’t stopped the stock from jumping 2.5% today to $54.75 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 0.6%.

But this party may not last with the broker tipping a 70% to 80% chance that Ramsay’s share price will fall over the next 60 days.

The dim view of the stock is based on Morgan Stanley’s belief that the group’s FY19 outlook and earnings guidance will be worse than what the market is expecting. Ramsay is scheduled to announce its results and outlook on August 30.

There are a few factors that are expected to weigh on Ramsay’s performance in the current financial year. The first is pressure on Australian private hospitals from more patients opting for the public system and demand for lower prices from private health insurers.

This trend is unlikely to change in FY19.

Then there are growing challenges in the UK market where Ramsay has a presence. The profit warning from Ramsay’s UK competitor, Spire Healthcare, that’s caused by fewer referrals from the National Health Service, leaves Ramsay exposed to similar issues.

Consensus forecasts for Ramsay are at risk of being cut when the group faces shareholders with its profit report card in three weeks.

“Our revised estimates imply flat FY19e NPAT outlook (vs consensus +5.7%),” said Morgan Stanley.

“RHC has fallen 12% since the company lowered FY18 guidance to ~7% from 8-10% previously on 21-Jun-18 (vs ASX200 +1% over the same period) and we expect further downgrades will continue to negatively impact the stock.”

The stock may need to fall towards Morgan Stanley’s price target of $50.00 a share before it sees any real buying support.

The irony is that Ramsay’s share price weakness comes at a time when overseas investor demand for Australian medical facilities stocks is strong.

International investors who have been spooked by escalating trade tensions between the US and China have been buying into the sector with shares like Sonic Healthcare Limited (ASX: SHL) and Healthscope Ltd (ASX: HSO) gaining ground – although the latter’s share price has also been inflated by a takeover bid.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended 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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