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The next ASX sector in a post COVID-19 earnings upgrade cycle

Listed medical and diagnostic facilities operators are outperforming the market today as the floodgates to elective surgeries are swung open.

The Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) share price and Sonic Healthcare Limited (ASX: SHL) share price jumped 2.7% each in the last hour of trade to $63.80 and $27.09, respectively.

The Healius Ltd (ASX: HLS) is trailing behind with a 1.9% increase to $2.40, but that’s still ahead of the 1.3% gain by the S&P/ASX 200 Index (Index:^AXJO).

Consensus earnings upgrade candidates

These companies could see a big boost to earnings as the Australian Financial Review reported on the upcoming “hidden wave” or elective surgeries and tests.

The federal government announced that it was loosening restrictions on elective surgeries as the country appears to have the COVID-19 pandemic under control.

The clampdown on non-life-threatening procedures was to ensure that our hospital system had the capacity to cope with the potential spike in emergency coronavirus patients.

Pent-up demand to hit

The warnings and response from the government to COVID-19 had another unintended consequence. Australians started putting off regular check-ups as they were worried about clogging up our health system and putting themselves in close proximity with possible COVID-19 patients.

The big drop in attendances and elective surgeries pressured the earnings of private hospitals and clinics, while falling demand for diagnostic tests (other than for coronavirus) impacted on Sonic.

However, that’s about to change and shares in Ramsay, Sonic and Healius could regain the lost ground from February.

Six-month backlog

Pent-up demand from deferred medical checks and minor procedures are likely to force medical facilities to operate overtime over many months.

The six-week clampdown on elective surgeries created a backlog of nearly 400,000 cases, according to consultant surgeon and senior lecturer at the University of Newcastle, NSW, Dr Peter Pockney.

He co-authored a major study on the return of elective surgery in 190 countries and he was reported in the AFR as saying that “it would take 22 weeks to clear if hospitals increase the number of surgeries performed each week by 20 per cent compared to pre-pandemic activity”.

Counting the costs

Elective surgeries are only one side of the problem. Australians have also put off cancer screening. The AFR also quoted the chief executive of Cancer Council Australia, Professor Sanchia Aranda, estimating that one in 10 people may have delayed checks during the lockdown.

If these delays lasted for six months, Professor Aranda believes 7,000 cancers will be picked up later. The later a cancer is detected, the higher the chance of death.

The only potential problem I see now is the waiting time to get in to see your doctor.

Not taking drastic action on COVID-19 costs lives, but acting aggressively to contain the pandemic is likely to be just as, if not more costly.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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.

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