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Why I’m banking on Pro Medicus Limited (ASX:PME)

Credit: loctran7811

I must admit to kicking myself for not waking up a couple of years earlier to the growth potential of software-as-a-service operator Pro Medicus Limited (ASX: PME).

A laissez-faire attitude to investing can hurt your wealth, as  basic arithmetic means a company will find it increasingly hard to maintain compound growth rates as it grows larger. For example it it easier to double in size from $100 million to $200 million than $500 million to $1 billion.

Pro Medicus is now valued around $1 billion, which on a trailing basis looks expensive, but this company is not about historical performance and may still thump the market from here. Let’s take a look at a few reasons why.

Functionality – Pro Medicus offers a software-as-a-service (SaaS) medical imaging platform to healthcare clients in the public or private sector that allows them to store, mange, and utilise patient records for diagnosis on its platform. For example different medical professionals at the same practice can view multiple images on mobile or desktop platforms.

In that sense it can help cut out the bureaucracy or waste that the healthcare sector has a reputation for as it helps users save time and money.

U.S. growth – the stock has rocketed as the group has been able to sign up blue-chip U.S. healthcare clients such as Yale New Haven, Mayo Clinics, and Mercy healthcare. Moreover, its CEO regularly boasts that its new client pipeline is full of potential big new money-spinning wins. So far the CEO has delivered on his ambitions and there’s plenty to suggest the group may sign up many more major clients over time. Europe and Australia are also other notable growth markets.

Economics – this is a SaaS business and as such boasts the attractive economics of recurring revenue and high gross profit margins. Healthcare imaging and diagnostic systems are also sticky once installed as a provider is unlikely to want to uproot their entire medical imaging system unless they have an urgent reason to.

Competitive position – obviously this is hard to properly quantify but the CEO continues to report his belief that Pro Medicus is 12 to 18 months ahead of competitors in terms of product quality and development. Its new client wins also suggest it is a market leader, which is unusual for a software small cap on the ASX.

Balance sheet – The group is profitable and has $25.2 million cash on hand. In fact it hasn’t raised capital in recent times and doesn’t look likely to in the future. Unlike SaaS rival Nearmap Ltd (ASX: NEA) for example.

In turn this means Pro Medicus has not attracted much coverage from sell side brokers or investment banks who want to win capital raising advisory work via favourable coverage. It follows that the less a stock is followed by the institutional investment community the more likely it is to be mispriced.

For now though it seems Pro Medicus’s valuation has got ahead of itself with the stock changing hands for $10.60 per share on a triple-digit multiple multiple of trailing earnings.

However, profits are likely to grow rapidly as more contracted revenue comes online in the next few years, with the potential for big new contract wins to be announced.

I first covered Pro Medicus’s potential when it traded below $2 or so and foolishly watched it rise without buying into the business until its price had reached nearly $8.

I now own a small position, although feel the share price has run a little hot on the back of increased attention recently. As such I’d be inclined to try to buy the stock 10%-15% cheaper with a little patience.

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Tom Richardson owns shares of Nearmap Ltd. and Pro Medicus Ltd.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Pro Medicus Ltd. The Motley Fool Australia owns shares of and has recommended Nearmap Ltd. and Pro Medicus Ltd. 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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