Why I think the Sonic Healthcare share price is a buy

Here are three reasons.

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Key points

  • At their beaten-down price, I think Sonic Healthcare shares present an opportunity
  • The healthcare company is still growing revenue, including with its core operations
  • Sonic has been making acquisitions to boost its business and improve its growth outlook

The Sonic Healthcare Ltd (ASX: SHL) share price has seen plenty of volatility over the last two and a half years.

Adding its 20% decline in 2022 to the equation, I believe that the company’s beaten-down share price now offers compelling value.

Sonic Healthcare has medical diagnostic operations in several countries including Australia, the United States, Germany, the United Kingdom, Switzerland, Belgium and New Zealand. It also has clinical services and a growing radiology division.

A pathology business may sound a little boring, but I think there’s plenty to be excited about. Here are three reasons why I think Sonic Healthcare is an attractive long-term opportunity.

1. Acquisitions

The company has made a number of acquisitions in recent times, which I think will unlock longer-term growth for the ASX healthcare share.

In the FY22 first half, Sonic Healthcare put $585 million into acquisitions and investments.

That includes the ProPath acquisition in Dallas, Texas, which added US$110 million of revenue. The Canberra Imaging Group deal added A$60 million of revenue to the business.

It also invested in Harrison.ai for a 20% stake and established a pathology joint venture.

Sonic says that artificial intelligence has significant potential to enhance diagnostic accuracy, reproducibility and efficiency in pathology and radiology.

The company added that its deep clinical expertise, combined with Harrison.ai’s proven AI methodologies, were set to create a “powerful force” in healthcare AI.

2. Ongoing core revenue growth

In my opinion, one of the more important things that a business needs to be able to deliver good investment returns is decent revenue growth. It’s hard to grow profit if revenue isn’t rising.

Sonic Healthcare has benefited from high volumes of COVID-19 testing. But base revenue in the FY22 first half also rose by 4.3% year on year. Management is expecting ongoing growth of the base business, with “strong” underlying drivers, including a catch-up of testing postponed because of the COVID-19 pandemic.

Growth of the base business will help the core net profit after tax (NPAT) rise over time.

Sonic Healthcare has used its COVID testing cash windfall to make acquisitions and launch a share buy-back.

However, the ASX share is also expecting a sustainable level of COVID testing in the future including “routine COVID-19 testing, screening programs, variant testing, whole-genome sequencing, [and] antibody tests”.

There are still many thousands of PCR tests being done in Australia, although Sonic is not responsible for all of them. For example, New South Wales reported that 30,006 PCR tests were conducted in the 24 hours prior to 4pm on 1 June 2022.

3. Dividends

While Sonic Healthcare’s dividend yield is not exactly huge, its progressive dividend policy means that the dividend is steadily growing.

The trailing dividend yield is 2.6% at the current Sonic Healthcare share price, excluding the effect of franking credits.

In my opinion, an ASX share that pays dividends can usually offer a handy boost for returns for shareholders.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Sonic Healthcare Limited. 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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