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Is the Ramsay Health Care share price a buy?

Source: Ramsay Presentation

The Ramsay Health Care Limited  (ASX: RHC) share price has just recovered from hitting its lowest level in four years. After reaching an all-time high of $81.31 in September 2016, the share price (and Ramsay shareholders) have been suffering ever since. Ramsay did not come out of the recent correction unscathed, with the sell-off dragging the share price to a four-year low of $52.92 in October. It has since bounced back slightly and at the time of writing, is trading around the $58 mark.

Australia’s ageing population and ever-rising demand for medical services bode well for the healthcare sector, which has been one of the strongest performers on the ASX over the past decade. Stocks such as CSL Limited  (ASX: CSL) and NIB Holdings Limited  (ASX: NHF) have generated stellar returns for investors during this time.

Ramsay is Australia’s largest private hospital operator, with over 223 hospitals and more than 60,000 staff across several countries, with a strong and expanding presence in Europe. Ramsay has historically enjoyed strong returns on invested capital due to its ownership and management of flagship private hospitals in Australia, resulting in a reputation for high-quality care. The company’s scale also enables them to negotiate very effectively with private health insurers, which gives it enormous pricing power. This has enabled Ramsay to establish a significant cost advantage, which has underpinned its successful expansion both in Australia and overseas.

So, what has gone wrong?

Ramsay is facing some difficult structural problems going into 2019. Analysts are expecting core EPS growth of only 2% for the financial year, mainly due to some recent acquisitions that are not yet bearing fruit. Furthermore, declining private health insurance memberships and high out-of-pocket hospital costs are pushing more patients into the public health system, and out of Ramsay’s private hospitals, placing pressure on earnings.

However, Ramsay remains confident of its acquisitions and is planning on expanding their business into more areas into the future.

Foolish takeaway

Although Ramsay is facing some short-term headwinds, I believe the demographics of the healthcare sector, both in Australia and around the globe, provide a significant tailwind for the company. I believe Ramsay’s effective management team and expansion strategy make Ramsay Health Care a great addition for any long-term investor.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has recommended NIB Holdings Limited and 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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