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Why top brokers are upgrading Ramsay Health despite COVID-19 turmoil

The roller coaster ride on the market continues with the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) slumping deep into the red after giving up its morning rally.

But there’s one stock that’s holding up well today after not one, but two, leading brokers upgraded the stock to “buy” even after it withdrew its profit guidance.

The stock in question is Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC). The Ramsay share price jumped 2.1% in after lunch trade to $55.58 while the ASX 200 tumbled 2.3%.

In contrast, other medical facilities stocks are also under pressure at the time of writing. The Healius Ltd (ASX: HLS) share price lost 5% to $2.45 while Sonic Healthcare Limited (ASX: SHL) crashed 6.9% to an 11-month low of $24.70.

Withdrawing guidance

The jump in Ramsay’s share price is notable because the hospital operator told investors yesterday to ignore its previous earnings estimates for the current financial year.

Ramsay joins a growing list of ASX companies to tear up their guidance in the face of the COVID-19 pandemic. These companies include gaming machine maker Aristocrat Leisure Limited (ASX: ALL), property developer Mirvac Group (ASX: MGR) and our national carrier Qantas Airways Limited (ASX: QAN).

The global economy is coming to a screeching halt as countries impose strict quarantine laws to control the spread of the virus.

Strong balance sheet to weather the uncertainty

Ramsay’s move to cross out its outlook won’t come as a surprise to anyone as precious few companies can forecast earnings with any level of confidence in this volatile environment.

But Citigroup thinks this is the right time to be snapping up the stock and moved to upgrade its recommendation on Ramsay to “buy” from “neutral”.

“We believe that the debt position of the company is strong, and that at the other end of this crisis, the relative value of hospital infrastructure will be enhanced,” said the broker.

“In the near term it is possible that earnings are higher than forecast, as elective surgery is brought forward and some government services are moved into the private sector.”

Earnings catalyst on the horizon

Citigroup isn’t alone in its bullish take on Ramsay. Credit Suisse thinks demand for services at its hospitals will hold up through the crisis and it upgraded the stock to “outperform” from “neutral”.

Credit Suisse believes that the deferral of elective surgeries at public hospitals, which are clearing the decks to cater to an expected surge in coronavirus patients, will provide a catalyst for a resurgence in private hospital volumes.

Using New South Wales elective surgery data as an example, the broker thinks that Ramsay’s revenue in the second half of FY21 will get a decent boost.

“With limited elective surgeries likely performed over 2Q 2020 and into 3Q 2020, we estimate the NSW public hospital elective surgery waiting list could be well in excess of100k people by Sept-2020 (+17% p.a.),” said Credit Suisse.

“Once the impact of COVID-19 eases, we expect to see a resurgence in elective private hospital volumes, as public hospitals will remain constrained.”

Citi’s target price on Ramsay is $75 a share while Credit Suisse’s target is $70 a share.

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Motley Fool contributor Brendon Lau owns shares of Aristocrat Leisure Ltd. The Motley Fool Australia has recommended Ramsay Health Care Limited and 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.