The share price of Australia's largest private hospital operator Ramsay Health Care Limited (ASX: RHC) has fallen 12% over the last 12 months, significantly underperforming the broader market's gain of 8%.
The former market darling has lagged the performance of other large-cap healthcare companies such as Cochlear Limited (ASX: COH), CSL Limited (ASX: CSL) and ResMed Inc. (ASX: RMD).
With the share price hovering just above its 52-week low of $53.01, is it time to buy shares in Ramsay?
Slowing growth
The weakness in Ramsay's share price has occurred due to a number of factors, ranging from a forecast slowdown in growth domestically and difficult trading conditions in France and the UK.
Ramsay saw core earnings per share increase by 7% in FY18, missing its own initial forecast of 8% to 10% growth announced last August. The company's Australian operations remain the crown jewel in its portfolio with EBITDA rising by 12% in FY18. Ramsay expects volumes to continue to grow but at a slowing rate for FY19, as the industry battles falling private hospital participation rates that peaked in 2015.
The international operations of Ramsay remain a concern with EBITDAR in France and the UK falling by 1% and 10% respectively over the prior period due to a difficult tariff environment and a significant downturn in NHS volumes. The company expects trading conditions in the UK to remain challenging in FY19 and maintains a neutral outlook in France.
Ramsay will be impacted by higher interest and tax in FY19 with expected core EBITDA growth of 4% to 6% in FY19 to translate into earnings per share growth of 2%. This would see Ramsay post earnings per share of $2.85 in FY19, well below the consensus estimate of $3.11 from over a year ago.
The growth in earnings that management has forecast for FY19 is below the compound annual growth rate of 12.5% in earnings per share Ramsay has delivered over the last 4 years. The reduced expectations of future growth has resulted in a justifiable contraction in the company's premium valuation multiple.
Foolish takeaway
Ramsay is currently trading for $54.20, which prices the stock at around 19 times forward earnings. Interestingly, Ramsay is trading at a lower valuation than its rival Healthscope Ltd (ASX: HSO).
Ramsay is the leading operator in the private health space and I would expect the company to grow over the long-term via demographic tailwinds, brownfield expansions, and any possible acquisitions. Whilst there are a number of positives for the long-term, the upside in the near-term looks limited based on the operating environment, and in my view makes the current valuation seem appropriate.
