The Ramsay Health Care Limited (ASX: RHC) share price has fallen back to just under $55. This is a long way below the previous highs of above $80.
Many investors might look at this fall of more than 30% and think that Ramsay is now a clear buy.
I myself was a keen Ramsay follower. There was a lot to like about Ramsay – the ageing demographics, the defensive earnings and international operations.
Indeed, today Ramsay announced to the ASX that its French subsidiary, Ramsay Generale de Sante, has lodged its offer document with the Swedish Financial Supervisotry Authority in relation to its SEK48.5 cash per share takeover offer for Capio AB. The acceptance period commences on 6 September 2018 and expires on 25 October 2018, though the acceptance period may be extended.
If this takeover does go ahead then it would be sizeable increase to the European operations and would be a good fit.
However, acquisitions alone probably won't turn sentiment around for Ramsay. The private hospital operator was routinely delivering profit growth of double digits each year. In FY19 management is guiding profit growth of up to 2%. A far cry from the growth over the past two decades.
The problem is that although Ramsay has fallen so much in price, it is still trading with a price/earnings ratio of around 20. Yet, the large USA-listed HCA Healthcare is only trading with a p/e ratio of around 15. If Ramsay was predicting profit growth of 10% then its PEG ratio would be 2 – quite high – but up to 2% growth makes the valuation look even less appealing. Just because a business has been at a share price of $80, doesn't mean it deserves to get back there quickly!
Ramsay is facing troubles in the UK, France and Australia. Healthcare is essential, but affording it in the long-term could be problematic. Insurance policyholders are seeing premiums grow faster than inflation. Governments face a growing avalanche of costs in the face of ageing demographics.
Foolish takeaway
Ramsay is a high quality business with strong operations, attractive re-investment plans and international acquisition ideas. However, I'm in no rush to buy shares these days because the medium-term outlook looks difficult. There is little reason to think it will re-rate in the coming year.
If the share price falls to below $50 then the value could become attractive to me, but at around $55 I can't see myself wanting to invest in Ramsay shares over the next 12 months.
