Why this broker upgraded the embattled Pro Medicus (ASX:PME) share price to “buy”

Could there be some light ahead for the medical software management company?

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ASX share price broker upgrade ASX lithium shares buy represented by upgrade button on computer keyboard

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Highlights:

  • Expensive shares like the Pro Medicus share price have crashed in 2022 due to interest rate fears
  • But Morgans believes the >20% crash in Pro Medicus is a buying opportunity ahead of its results
  • The broker upgraded its shares to “add” from “hold” with a price target of $54.49 a share

The beaten-down Pro Medicus Limited (ASX: PME) share price could finally be catching a break with Morgans upgrading the company’s shares.

The spectre of rising interest rates has taken its toll on the medical management software company. But the broker believes there is too much bad news priced into the Pro Medicus share price.

This is despite the fact that Pro Medicus is still trading on a FY22 forecast price-to-earnings (P/E) multiple of 100 times.

Why the Pro Medicus share price is tumbling in 2022

Shares trading at a steep premium have taken the brunt of the latest market sell-off. Their valuations take a big haircut as interest rates rise.

The US Federal Reserve is set to lead the way to higher global rates. The central bank is tipped to lift rates three times in 2022, and some experts are warning the Fed could even hike four times to tame inflation.

Against this backdrop, the Pro Medicus share price crashed by around 26% over the past month. It isn’t the only one swept up in ASX market sell-off. The Zip Co Ltd (ASX: Z1P) share price and Megaport Ltd (ASX: MP1) have also shed around 20% each over the period.

Is it time to buy Pro Medicus shares?

But, according to Morgans, investors should consider buying Pro Medicus shares ahead of next month’s profit reporting season. The broker has upgraded its recommendation to “add” from “hold”.

“With the share price now significantly more attractive than it was a month ago, we view current prices as a good entry for long-term investors, but also potential trading positions with reduced risk heading into in the upcoming result,” said the broker.

“Short-term risks around the upcoming results remain with full expectations.

“While we sit slightly below consensus, we view any miss as more likely due to timing of contract recognition rather than overheated underlying expectations.”

Long and shorter-term value emerging

Consensus forecasts have set a high hurdle for management to jump over. The average analyst estimate is for a more than 44% increase in revenue and more than 58% uplift in earnings before interest and tax over the same period last year.

But for those willing to ignore the shorter-term gyrations in earnings and market sentiment, Morgans believes the long-term growth drivers for the Pro Medicus share price remains strong.

Morgan’s 12-month price target on the shares is $54.49. This should give investors around a 20% upside if dividends are included.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended MEGAPORT FPO, Pro Medicus Ltd., and ZIPCOLTD FPO. The Motley Fool Australia owns and has recommended Pro Medicus Ltd. The Motley Fool Australia has recommended MEGAPORT FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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