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Are shares of Ramsay Health Care Limited (ASX:RHC) a buy?

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.

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Motley Fool contributor Tim Katavic owns shares of CSL Limited and Ramsay Health Care Limited. The Motley Fool Australia has recommended Cochlear Ltd., Ramsay Health Care Limited, and ResMed Inc. 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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