Why this top broker tips 20% upside for the Sonic Healthcare share price

The Sonic Healthcare share price has underperformed its sector peers in 2022. Two brokers say buy.

| More on:
Two happy scientists analysing test results.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • The Sonic Healthcare share price has underperformed its sector peers in 2022
  • Two top brokers say buy, with one tipping a 20% gain over the next year 
  • Sonic is using its strong balance sheet position to target growth, spending $585 million on acquisitions and joint ventures in H1 2022

The Sonic Healthcare Limited (ASX: SHL) share price is edging higher today, up 0.24% to $32.84.

But like most ASX shares in 2022, it has struggled amid lower market sentiment as inflation and interest rates rise.

On the first day of trading this year, Sonic Healthcare shares closed at $46.14. So, the pathology provider has endured a 28.8% loss in share price value year to date.

Based on this, Sonic has underperformed its peers in the sector in 2022. The S&P/ASX 200 Health Care Index (ASX: XHJ) is down 16.7% year to date.

However, over the past 12 months, Sonic has outperformed the index, down 10.5% compared to 15.8%.

How do the experts view the Sonic Healthcare share price?

Top broker Bell Potter believes Sonic Healthcare is well-placed for growth. It points to the growing demand for pathology services and international expansion opportunities.

The broker said:

[Sonic is] the world’s third largest pathology provider with significant operations in the USA, United Kingdom, Germany, Switzerland, Belgium, Australia and New Zealand. Against the backdrop of continuing growth in the demand for pathology services over the longer term, the group has further international expansion opportunities in both existing and new geographical markets.

Another top broker, Morgan Stanley, doesn’t just say buy, it says go overweight on this one.

The team has put a price target of $40 on Sonic Healthcare shares, implying a potential gain of more than 20% in 12 months’ time.

The broker says Sonic has benefitted from massive COVID-19 testing. This boosted its earnings in FY21 and the broker is expecting the same for FY22.

Morgan Stanley also points out that Sonic’s base business revenue is also rising. HY22 base revenue was up 4.3% year-on-year and up 2.5% compared to HY20 (before COVID-19).

However, the team expects earnings to normalise in FY23. So, they value the Sonic Healthcare share price at 10 times FY22 estimated earnings and 16 times FY23 estimated earnings.

What else is happening at Sonic Healthcare?

In its half-year results for FY22, Sonic Healthcare revealed it had spent $585 million in acquisitions and joint ventures during the half. It plans to continue to explore further opportunities for expansion.

CEO and managing director Dr Colin Goldschmidt said:

During the half-year Sonic invested A$585 million in acquisitions and joint ventures that will enhance the future growth of the company. The acquisition of Dallas-based ProPath has significantly strengthened Sonic’s anatomical pathology operations and management in the USA, whilst the acquisition of Canberra Imaging Group has materially expanded the revenue, footprint and talent of Sonic’s Radiology division.

Our strategic investment into Harrison.ai and the establishment of a pathology AI joint venture is a very exciting step for Sonic. Harrison.ai is a leading global healthcare AI company and we believe that the combination of Sonic and Harrison.ai, through our joint venture, will be a powerful force in developing best-in-class AI diagnostic tools for pathology.

Sonic’s global management teams continue to focus on identifying and assessing synergistic acquisitions and outsource contracts. Sonic is well positioned to continue to invest in and expand the business with an active pipeline of opportunities under evaluation, backed by a very strong balance sheet.

What about dividends?

As my fellow Fool Tristan reported recently, Sonic has a ‘progressive dividend policy’.

This has led to the company increasing its dividend every year for approximately a decade.

Most recently, Sonic Healthcare upped its interim dividend by 11% to 40 cents per share.

And it was 100% franked too, which is not usual for the stock.

Motley Fool contributor Bronwyn Allen 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.

More on Broker Notes

A male investor wearing a white shirt and blue suit jacket sits at his desk looking at his laptop with his hands to his chin, waiting in anticipation.
Broker Notes

Why one broker is bullish on this ‘unloved and undervalued’ ASX 200 share

The company is due to release it earning results tomorrow.

Read more »

ASX shares Business man marking buy on board and underlining it
Broker Notes

Leading brokers name 3 ASX shares to buy today

Here's why brokers rate these ASX shares as buys...

Read more »

Four businessmen in suits pose together in a martial arts style pose as if ready to engage in competition or spring into a fight.
Broker Notes

Is this ASX bank share a better buy than the big four banks?

One alternative bank share might be looking too cheap to ignore.

Read more »

A man in his 30s holds his laptop and operates it with his other hand as he has a look of pleasant surprise on his face as though he is learning something new or finding hidden value in something on the screen.
Resources Shares

Is the Santos share price a buy following the energy giant’s latest acquisition?

Santos has slipped, should investors seize the opportunity?

Read more »

Man sitting in a plane seat works on his laptop.
Travel Shares

Do experts think the Flight Centre share price is ready for imminent takeoff?

We consider whether this ASX travel share has the ticket to growth.

Read more »

Man sitting at a laptop in an office throws a book into the air and cheers.
Broker Notes

2 quality ASX shares Wilsons just bought

One medical and one lithium stock have had their exposures increased in the advisory's portfolio.

Read more »

happy investor, share price rise, increase, up
Small Cap Shares

2 exciting small cap ASX shares to buy according to brokers

These small cap ASX shares have been named as buys by brokers...

Read more »

A white and black clock face is shown with three hands saying Time to Buy reflecting Citi's view that it's time to buy ASX 200 banks
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers are feeling positive about these ASX shares...

Read more »