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Why Sonic Healthcare shares are down over 9% this morning

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Sonic Healthcare Limited (ASX: SHL) shares are the latest financial victim of coronavirus with the medical diagnostics company withdrawing its FY20 earnings guidance as a result of the pandemic.

At the time of writing, the Sonic share price has fallen 9.16% in response to the news. Sonic Healthcare shares had already lost around 21% from their February highs, but are performing better than the general market, with the S&P/ASX 200 Index (ASX: XJO) down over 30%. 

COVID-19 update

Sonic Healthcare told the market that its trading results have been consistent with earnings guidance for the first 8.5 months of the year. As populations in Sonic’s markets self-isolate or are quarantined, however, there is potential for diagnostic testing volumes to be impacted in the short to medium term. 

Sonic’s CEO Dr Colin Goldschmidt said, “as a global laboratory company, Sonic is currently playing a crucial frontline role in combating the pandemic. Our laboratories in Australia, the USA and Europe are testing thousands of patients every day for COVID-19, and we continue to increase our testing capacity to meet the needs of communities in which we operate.”

Sonic is working with governments and other healthcare organisations to provide assistance in the face of the pandemic. It is also working closely with manufacturers and suppliers to ensure it continues to have the necessary materials and equipment for COVID-19 testing. 

At the half-year, Sonic was travelling well, with revenue up 15% to $3.3 billion and solid organic revenue growth of around 5%. The company recorded a net profit after tax (NPAT) of $254 million and maintained its progressive dividend policy. The interim dividend was up 1 cent (3%) to 34 cents. 

CEO Goldschmidt told the market at the time, “Sonic Healthcare has reported record results for the half year. The results for the half year demonstrate the predictable, reliable nature of Sonic’s business, with the company on track to deliver earnings growth guidance.”

Potential to benefit

While circumstances may have turned out less predictable than Goldschmidt might have hoped, some have speculated Sonic could actually benefit from coronavirus. Sonic’s laboratory in Europe was reportedly the first in Europe to establish a valid test for coronavirus, and Sonic is participating in ongoing coronavirus testing. 

The issue, however, is that the volume of routine laboratory tests is likely to be impacted in Sonic’s key markets. The ultimate question then, is whether an uplift in coronavirus testing is enough to offset a decline in routine testing. 

Sonic today emphasised that its balance sheet was in a strong position. The company has almost $1 billion in cash, although is due to pay $162 million in interim dividends on 25 March. Committed credit facilities are available and none of Sonic’s debt facilities are due to mature until calendar year 2021. 

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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.

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