The S&P/ASX 200 Index (ASX: XJO) healthcare stock Pro Medicus Ltd (ASX: PME) have performed incredibly well. It's up more than 90% in 12 months, and over 480% in five years, as we can see on the chart below. It hit a new all-time high of $119.09 during Wednesday's trading, rising by around 3% by the end of the day.
After such an incredible performance, investors may be wondering if this IT healthcare stock is a buy or not.
Why is the ASX 200 healthcare stock soaring?
The business continues to deliver on its strategy.
Pro Medicus is one of the most profitable businesses on the ASX, with an earnings before interest and tax (EBIT) margin of 66%. That means around two-thirds of revenue is turning into EBIT. The net profit after tax (NPAT) margin was 49% in the FY24 first-half result, so around half of the new revenue is turning into NPAT.
Impressively, margins are continuing to climb as the company's footprint increases. Pro Medicus says it has a highly scalable offering, with a contained cost base.
It's delivering excellent revenue growth as it wins more contracts in Europe and North America.
I'll mention its biggest contract won in FY24 to date – in September 2023; it won a $140 million contract (over 10 years) from BaylorScott&White Health. It has also won a $24 million contract over seven years, a $16 million contract over eight years and a $20 million contract over eight years.
When you add those new contracts to the ASX 200 healthcare stock's previously-announced revenue, at the margins it's earning, the company is clearly on track for strong profits over the rest of this decade.
Is it too late to buy?
Pro Medicus is clearly one of the best businesses on the ASX.
The company's service offers several benefits to its clients, including "significant IT and infrastructure savings, improved physician engagement, unparalleled increase in radiologist efficiency, delivers superior value proposition and greater clinical accuracy."
It's aiming to grow in a number of different ways including winning new clients, seeing transaction growth from existing clients, delivering new product offerings, extending to new geographical markets and leveraging its research and development capability to introduce the next generation of products.
Management says there is a very significant addressable runway, and its pipeline is strong.
The question is – what valuation makes sense for the ASX 200 healthcare stock? According to the forecasts on Commsec, the Pro Medicus share price is valued at 154x FY24's estimated earnings and 93x FY26's estimated earnings. That's a very high earnings multiple, particularly when interest rates are still so high.
Profit is growing strongly, but it's difficult to say what the right price is. I'd be exceptionally happy if I were a long-term shareholder. I'm just not sure what a fair earnings multiple is for the business.
According to Commsec, the business currently has four sell ratings, five holds, and six buys. The average rating is a hold, but there are a range of views.
