Is the slashed Sonic Healthcare share price a 'buying opportunity'?

Is this stock a healthy opportunity?

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The Sonic Healthcare Ltd (ASX: SHL) share price has fallen almost 20% this year, while the S&P/ASX 200 Index (ASX: XJO) is up approximately 2% in the same time period.

One expert thinks this sell-off could be an opportunity.

As one of the world's largest providers of pathology services, Sonic is a significant ASX healthcare share player. Healthcare is typically a defensive sector, so some investors may see this heavy decline as uncharacteristic.

Writing on The Bull, Dylan Evans of Catapult Wealth believes Sonic Healthcare shares could be appealing at this level.

Expert's positive view on Sonic Healthcare shares

Evans points out that the company's sell-off was triggered by the market's response to an earnings downgrade.

Despite that bad news, he believes Sonic Healthcare shares are a buy at the current level, suggesting the company can regain momentum despite the fact it's taking longer than expected to reduce costs.

Sonic Healthcare's earnings dropped in FY23 as COVID testing revenue subsided.

Earnings recap

On 21 May, Sonic revealed it's now expecting FY24 revenue to be $8.9 billion and earnings before interest, tax, depreciation and amortisation (EBITDA) to be $1.6 billion.

Profit growth was lower than expected, partly because of inflationary pressures impacting the business and worsened by currency exchange headwinds. A number of profit improvement initiatives the company planned to complete in the second half of FY24 have been "slower to deliver than expected" and will instead contribute to earnings growth in FY25. Sonic also expects inflation pressures to ease going forward.

It guided that EBITDA could be between $1.7 billion to $1.75 billion in FY25 (compared to $1.6 billion for FY24).

Weakness can be an opportunity

While short-term profitability is challenged, there are some positives.

In the four months to 30 April 2024, the company saw organic revenue growth of 6%, which is a solid growth rate.

Sonic also pointed out that it has made a number of investments which can help earnings growth (and Sonic Healthcare shares) in the future, including Synlab Suisse and Dr Risch in Switzerland and PathologyWatch in the US.

In the May update, Sonic Healthcare CEO Dr Colin Goldschmidt said:

Overall, the company remains in a very strong position, both financially and in terms of market positioning.

We remain well set for growth in revenues and earnings going forward, including realising over the next two years the synergies and enhanced returns from the investments made this year.

In managing our costs, especially labour costs, we have been mindful to protect our brands and to support our ongoing strong growth and the high quality of essential services we provide.

According to the forecast on Commsec, the Sonic Healthcare share price is valued at 20x FY26's estimated earnings.

Motley Fool contributor Tristan Harrison has positions in Sonic Healthcare. 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. 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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