There are a number of S&P/ASX 200 Index (ASX: XJO) healthcare shares that we can pick from. CSL Limited (ASX: CSL) shares may be one of the most recognised companies on the ASX. But, Sonic Healthcare Limited (ASX: SHL) shares could be an even better choice.
Sonic Healthcare is not exactly a small-cap ASX share. According to the ASX, it has a market capitalisation of close to $16 billion.
The ASX 200 healthcare share describes itself as an "internationally renowned healthcare provider with specialist operations in laboratory medicine and pathology, radiology, general practice medicine and corporate medical services".
Its main source of earnings comes from pathology. Sonic employs more than 1,800 pathologists and radiologists, and more than 14,000 medical scientists, radiographers, sonographers, technicians, and nurses.
Sonic Healthcare has operations in countries including Australia, New Zealand, the USA, Germany, and other European countries.
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Expert sees an opportunity with this ASX 200 healthcare share
According to reporting by the Australian Financial Review, the broker RBC Capital Markets has increased its price target on Sonic shares to $43, up from $42, thanks to a positive trading update. That implies a possible rise of around more than 30% over the next 12 months.
That trading update showed two different sets of comparisons, which enabled investors to see how the company was trading.
Total revenue for the four months to October 2022 was $2.73 billion. This was down 11.7% year over year, but up 20.9% compared to the four months to October 2019 (pre-COVID times).
COVID testing didn't exist in October 2019, but in the four months to October 2022, Sonic Healthcare generated $280 million of COVID testing revenue. That's despite lockdowns being a thing of the past in the countries that it operates in. However, COVID testing revenue was 64.8% lower than in the four months to October 2021.
Sonic's base business revenue was $2.45 billion in the four months to October 2022. This was a 6.7% increase year over year and an 8.5% increase compared to the four months to October 2019.
The numbers were more pronounced with operating profit, which Sonic explained was due to the fact that COVID testing – which saw a year-over-year decrease – utilises existing Sonic infrastructure, meaning it generated a higher profit on that revenue. Lower COVID testing meant considerably lower profitably. Fee revenue for each COVID test has also reduced.
Earnings before interest, tax, depreciation and amortisation (EBITDA) for the four months to October 2022 came to $621 million. This was a 37.3% decrease year over year, but a 32.7% increase compared to the four months to October 2019.
Expert commentary
The broker RBC Capital Markets said, according to the AFR:
Sonic Healthcare's trading update for the 4 months to October 22 revealed the base business grew 6.7% (performing better than we expected) and is 7.8% higher than pre-pandemic levels.
However, the company's margins compressed more than we anticipated. While we have had to cut our FY23 forecasts, we now expect Sonic Healthcare's earnings to inflect in FY24 and those investors who have been waiting for positive earnings momentum can begin to re-evaluate the stock again.
Sonic Healthcare share price snapshot
While the ASX 200 healthcare share has dropped around 5% in the last week, it's up approximately 3% over the past month.
