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Ramsay share price up 26% YTD: is it a buy?

Ramsay Health Care Limited (ASX: RHC) shareholders have been rewarded for holding the stock in 2019 very handsomely so far. Ramsay shares started the year around the $57.76 mark, but as of the time of writing today, Ramsay shares are trading places for $72.84 a share, a gain of over 26% for the year so far. So what is behind Ramsay’s surge in price? And are Ramsay shares a buy today?

A Ramsay refresher

Ramsay Health Care is Australia’s largest private hospital owner-operator. Ramsay boasts over 220 hospitals across Australia as well as in the United Kingdom, France, Indonesia, and Malaysia. The company has concentrated on building a brand around low-cost, high-quality care, which they have executed on successfully.

As Ramsay has grown, its ability to use its scale to force down costs has grown with it. The company is able to effectively negotiate with providers of private health insurance like Medibank Private Ltd (ASX: MPL), as well as suppliers of medical equipment and medicines, which has helped Ramsay achieve a significant cost-advantage as well as a high return on capital of its investments.

What is behind this price surge?

So as you can see, there is a lot to like about Ramsay as a business. The company was facing some structural challenges earlier this year regarding some of the company’s acquisitions, but investors are now looking past these as Ramsay expects that core earnings-per-share growth will resume at historical levels from next year. Further, with the surprise re-election of the Liberal/National parties in May, the threat of capped private health insurance price rises that the Labor Party had proposed has now been priced out of Ramsay’s shares.

Ramsay has a very impressive record of increasing its dividend every year since 2000. In today’s market environment, quality dividend-yielding shares are being priced at a premium (yesterday’s interest rate cut will do nothing to slow this trend) and so this had undoubtedly lead to further appreciation in the Ramsay share price.

Is Ramsay a buy today?

The appreciation in Ramsay’s stock price over the year so far now leaves the company with a price-to-earnings ratio of nearly 40. This is a touch high for my liking, because although Ramsay is a quality company with many tailwinds behind it as well as a growing dividend, it does not have growth rates to justify this pricing optimism (in my humble opinion).

Instead,  I would have a look at these far cheaper shares right now!

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