Is the Nanosonics share price a buy?

The Nanosonics Ltd. (ASX: NAN) share price still sits well below the 52-week high of $3.86 despite continuing to rally with global markets since the pre-Christmas plunge.

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The Nanosonics Ltd. (ASX: NAN) share price is currently trading at $3.50, down 0.14% for the session, and still well below its 52-week high of $3.86 despite continuing to rally with global markets since the pre-Christmas plunge.

Nanosonics is an ASX200 listed healthcare company that specialises in the development and commercialisation of infection control solutions.  It has a global footprint and is approved for sale across most major markets.

Its global installed base of Trophon devices grew to 17.7k in FY2018 with continued growth expected in FY2019.  The total opportunity for installed bases is currently estimated to be 120k, meaning only 15% of the total market has been penetrated.

Along with the growth in installed bases, Nanosonics is also beginning to benefit from a second revenue stream as customers begin to replace Trophon units that are more than 5 years old.  This additional area of work is set to grow substantially over the next three financial years, as a large proportion of customers currently have devices that are three to five years old.

Looking further ahead, continued changes in guidelines regarding disinfection control of semi-critical probes will provide positive tailwinds to sales growth.  The re-negotiation of a major agreement with General Electric Company (NYSE: GE) at the start of FY2020 is also set to result in a material increase in margins.

Whilst there is a clear growth runway for Nanosonics' Trophon devices, some financial measures were softer than anticipated in the FY2018 results.  Sales Revenue was $7M lower than FY17, with Distributors running down inventories due to the pending launch of the Trophon2 device.  Operating expenses were also up in FY2018, largely due to increasing the number of employees to support product expansion. Despite the softer results, the cash position is very healthy at ~$69M and will support further expansion.

Nanosonics is due to report its first-half FY19 earnings on February 25.

So, is the Nanosonics share price a buy?

With earnings per share expected to grow three-fold by 2020, Nanosonics could represent a fantastic buy and hold option for your portfolio.  It has a product that is difficult to replicate and is supported by regulation along with sticky earnings, where a customer is unlikely to quickly change provider once using the Trophon device.  This could lead to the ability to increase margins via price once the company is happy with their market share position.

Looking at its ratios, Nanosonics is currently trading at an astronomical P/E of 183, almost ten times the sector average so its valuation currently looks stretched.  I think it's worthwhile to wait for a pullback and will just keep it in the watchlist for now.

Other ASX healthcare growth shares that may be worth looking into which could be more reasonably valued are ResMed Inc (ASX: RMD) and Pro Medicus Limited (ASX: PME).

Motley Fool contributor Michael Guinery owns shares in Nanosonics Limited, Pro Medicus Ltd and Resmed Inc. 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 Nanosonics Limited and Pro Medicus Ltd. The Motley Fool Australia has recommended 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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