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Should you buy Ramsay Health Care Limited (ASX:RHC) shares?

On Thursday the Ramsay Health Care Limited (ASX: RHC) share price fell heavily after the private hospital operator reported its full year results.

While a soft full year result was expected, management’s weak core earnings per share guidance of up to 2% for FY 2019 appears to have caught some investors by surprise.

I suspected that this might be the case and have been avoiding Ramsay’s shares. But after yesterday’s selloff is it now cheap enough to buy?

Are Ramsay’s shares cheap enough to buy?

While I think Ramsay is looking a lot more attractive now than it was 12 months ago, it’s still not quite cheap enough for me to hit the buy button. If its shares fell below $45.00 I would be tempted, but until then I just don’t see a good enough risk/reward.

I’m not alone in thinking this way. A note out of Goldman Sachs reveals that its analysts have retained their sell rating and $49.00 price target on Ramsay’s shares following its full year results release.

According to the note, the broker has a few doubts over management’s EBITDA growth guidance for FY 2019.

The notes states that: “Whilst core FY19E EBITDA growth guidance of 4-6% appears reasonable enough during a year that is now well understood to be challenging, we believe the implied growth of 6-8% required for the core Australian business may be a challenge, given company comments around ‘subdued growth’ and ‘flat margins’.”

The broker also noted that Ramsay must renegotiate its agreements with its two larger payors within the next 12 months. These renegotiations come at a time when healthcare affordability is expected to be a central issue given the upcoming Federal election. In light of this, the broker feels that the negotiating stance of these payors with be more robust than previous years.

All in all, I would suggest investors stay clear of Ramsay until its shares offer more value. Healthcare shares such as CSL Limited (ASX: CSL) and Mayne Pharma Group Ltd (ASX: MYX) could be worth a look instead.

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Motley Fool contributor James Mickleboro 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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