Director or insider buys can be a sign that those with the most insight into a company view its shares as undervalued.
Insider buying is the purchase of shares in a company by an officer or executive of that company, such as a director. Insiders usually have exclusive insights into the companies they manage and are likely to purchase shares when they view them as undervalued.
Depending on the circumstances, the purchase by an insider of shares can be seen as a vote of confidence in a business. Buys by multiple insiders can act as a stronger signal, as can larger, rather than smaller, share purchases.
With that in mind, let’s take a look at two S&P/ASX 200 Index (INDEXASX: XJO) healthcare shares with multiple insider buys last week:
Sonic Healthcare Limited (ASX: SHL)
Three Sonic Healthcare directors acquired an aggregate of 6,000 shares in the company last week for total consideration of around $176,240. Sonic Healthcare is one of the world’s largest medical diagnostics companies, providing laboratory and imaging services to medical practitioners, hospitals, and community health services. It also operates Australia’s largest network of primary care medical centres.
The Sonic Healthcare share price has fallen from a high of nearly $32 in February and is currently trading at $29.56 at the time of writing.
Sonic’s strong first-half results
In its half-year results, Sonic reported solid growth with revenue up 15% to $3.3 billion and organic revenue growth of ~5%. Net profit grew by 14% to $254 million, and a dividend of 34 cents per share was declared.
Sonic acquired Aurora Diagnostics in January 2019 and reports the business is performing well since the acquisition. Cost and revenue synergies are on track as the business performs in line with expectations. Sonic reports that organic growth was also strong, particularly in the Australian, UK, and Swiss laboratory businesses, as well as the Imaging division.
In the US, revenue grew by 45% during the half (including the Aurora acquisition), however on constant currency terms, organic revenue growth was 2%. The Australian Pathology business reported strong organic growth of 7%, while the UK and Ireland recorded 13% organic revenue growth and 16% total revenue growth.
Global Laboratory and Imaging divisions both expanded their margins during the half due to dedicated efforts by teams to identify and implement efficiency improvements.
The company is on track to achieve full-year earnings guidance of 6-8% growth in earnings before interest, tax, depreciation and amortisation (EBITDA), with first-half EBITDA growing 14% to $548 million.
Sonic reported investment grade balance sheet metrics at the end of the half with a gearing ratio of 29.9. Net interest-bearing debt was $2,350 million, up marginally from $2,299 million at 30 June 2019. Interest cover was 11.2x and debt cover was 2.1x.
Polynovo Ltd (ASX: PNV)
Two PolyNovo directors have bought an aggregate of 1,150,000 shares in the company over the past week or so. PolyNovo is a medical device company focused on developing and commercialising products using its unique polymer technology. Its NovoSorb BTM product is an implantable dressing that can be integrated into the body as it heals.
NovoSorb BTM works to regenerate the dermis (the underlying structure of the skin), providing a synthetic scaffold that blood vessels can migrate into. This allows new cells to regenerate and repopulate the structure before the product dissolved away.
The PolyNovo share price has fallen from an all-time high of $3.28 in February and is currently trading at $2.06 at the time of writing. PolyNovo shares fell dramatically in late February, dropping more than 20% in a day, following the release of its half-year results. Although PolyNovo reported an impressive increase in sales revenue, results fell short of market expectations.
What did PolyNovo report?
PolyNovo reported sales revenue of $8.57 million, a 129% increase over the prior corresponding period (pcp). Sales in January 2020 were more than three times sales in January 2019. The company advised that the rate of increase in sales is growing in existing markets and should grow further as new markets come to stream. Based on its half-year performance, PolyNovo expects NovoSorb BTM sales in FY20 should comfortably double those of FY19.
Total revenue of $10.18 million was reported including commercial sales of NovoSorb BTM of $8.57 million. Research and development (R&D) and new capital expenditure increased 92% to $3.22 million, while employee expenditure increased 86% to $6.79 million. The company delivered a net loss for the period of $2.42 million, up from a $1.92 million loss in the pcp. As at 31 December 2019, PolyNovo held $8.14 million in cash and short term investments.
During the half, PolyNovo achieved CE Mark approval with quick entry into the UK, Ireland, Austria, Germany, and Switzerland, quickly followed by its first patients. The NovoSorb BTM product is also approved for use in the US, Australia, New Zealand, South Africa, India, Malaysia, Singapore, and Israel. Approvals are being sought in South Korea, Taiwan, Mexico, Kuwait, and Sri Lanka.
New market opportunities
PolyNovo is in the process of building a factory in Port Melbourne which will produce products using its technology for use in hernia repair. According to PolyNovo CEO Paul Brennan, the hernia repair market is valued at $2 billion and is growing at 7% per annum. The hernia product will be used for abdominal wall repairs with usage planned to commence in 2021 in the US market.
PolyNovo is also exploring the use of its product in the breast market, which is valued at $2.5 billion to $3 billion, and to create drug eluding polymers that can go under the skin and release a dose of a drug each day.
While a single director buy may not be telling, several can provide a good indication that those best placed to know consider shares good value.
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As of 2.11.2020
Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Sonic Healthcare 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.