The Sonic Healthcare Limited (ASX: SHL) share price is outperforming this morning after its results allayed a key concern of its critics.
Shares in the medical diagnostic services group jumped 2.3% to a record high of $35.50 when the S&P/ASX 200 Index (Index:^AXJO) slumped 1% at the time of writing.
Even healthcare sector heavyweights were swept up in today's sell-off. The CSL Limited (ASX: CSL) share price tumbled 3.2% to $302.10 while Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) share price and Healius Ltd (ASX: HLS) share price shed around 1% each.
Improved profit and sales performance
Sonic is outperforming after posting stronger sales and earnings. Group revenue increased 11% to $6.86 billion while underlying net profit improved by 7% to $552 million in FY20.
Another standout was the 26% jump in operating cash flow to just over $1 billion, thanks in large part to prepayment of US Medicare testing fees.
Further, management held its final dividend steady at $0.51 a share, although when combined with the small increase in its interim dividend, the total payment for FY20 inched up 1.2% to $0.85.
Share price jumps as key worry laid to rest
You might think medical stocks can't put a foot wrong during the COVID-19 mayhem, but that couldn't be further from the truth.
Sceptics believed the drop in Sonic's core business will collapse as people avoided seeing their doctor for regular check-ups and other ailments.
Routine screening and diagnostics are the bigger profit drivers for the group as it collects fatter margins than coronavirus testing. So, the fear was that any surge in COVID-19 tests wouldn't be enough to save Sonic's bottom line.
However, Sonic proved the disbelievers wrong. While demand for its core services were hit hard at the onset of the pandemic, it's rebounded strongly. Its performance in several of its key markets, including those in Europe are holding up relatively well.
Margin pressure vs. revenue surge
The tipping of the scale towards COVID testing explains why there was some pressure on group margins. This is evidenced by the slower rate of growth for its bottom line.
But that's a small point. Sonic showed that it can have its cake and eat it thanks to cost cutting, while its Aurora acquisition at the start of 2019 also supplemented the growth.
Can the good times last for the SHL share price?
What's more, the growth momentum is carrying through into FY21. Management said that revenue in July and August is "substantially higher" than historical rates.
This is more to do with COVID testing than its base business, although the latter did experience a 5% revenue increase in July for most countries over the same month last year. Only the US and UK are down, but there are signs of a turnaround.
However, it might be too early to think that the current financial year will be a blockbuster earnings event for Sonic. Investors can't necessarily bank on the big upsurge in revenue to last for all of FY21 given that no when can predict how and when the pandemic will end.
