Not all stocks featured in the S&P/ASX 200 Index (ASX: XJO) have performed as swimmingly as the benchmark. Some of the index's biggest constituents meet the 'crash' criteria — falling 20% or more — despite the ASX 200 being up 10.3% over the past 12 months.
Sometimes, this visible divergence between the broader market and individual companies is where 'deep value' can be discovered. If the pessimism is misplaced, these shares can suddenly spring back once investors realise it.
I think a 90-year-old cornerstone of the healthcare industry has fallen into this camp.
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No more pandemic hangover for this ASX 200 stock
The COVID-19 pandemic injected a huge boost to Sonic Healthcare Ltd (ASX: SHL) between 2020 and 2022. As a pathology and laboratory heavyweight, Sonic's revenues surged from all the COVID-19 testing needed during this time.
In FY2022, approximately 26% of Sonic Healthcare's record-breaking $9.3 billion revenue came from COVID testing. However, demand for such services has rapidly dwindled since, falling to only $39 million in the first half of FY2024.
Where's the good news in losing roughly $2.4 billion of revenue in two years?
Well, the impact from here is capped at $39 million. Because of this, we can begin focusing back on the company's base business: traditional pathology, laboratory, and radiology services. Without the anchor of falling COVID revenues, we may start seeing a recovery in earnings.
Survival of the biggest
This ASX 200 stock currently trades at a price-to-earnings (P/E) ratio of 25 times. For reference, the global healthcare industry average is around 23 times earnings. Based on this, Sonic Healthcare appears to be nowhere near 'deep value' relative to its peers.
However, it's worth thinking about the industry dynamics currently at play.
Rising costs and flat medical rebates are putting pressure on the entire diagnostics industry. I believe this will create an environment where only the largest operators can succeed. Personally, I think this is why we're seeing Sonic Healthcare gobble up smaller competitors abroad.
There is some intrinsic value in being one of the biggest players.
Given the industry headwinds, I don't know if this ASX 200 stock can be labelled 'deep value'. However, the current $26.68 price tag is attractive when I take a long-term perspective on the company.
