Down around 40% since December 2021, the S&P/ASX 200 Index (ASX: XJO) stock Sonic Healthcare Ltd (ASX: SHL) is undervalued, in my view. I believe the market is underestimating Sonic's potential.
Just as international expansion has helped fellow ASX healthcare share CSL Ltd (ASX: CSL) shares (which is up 14% since 19 April), I think the Sonic share price can grow thanks to its global growth aspirations.
But there's more to like about the company than just the fact it's a global pathology business with operations in Australia, the United Kingdom, the United States, Germany and Switzerland.
Here's why I think Sonic Healthcare shares can rise in the long term.
Ongoing organic growth
A key thing I like to see from an ASX 200 stock is solid revenue growth because that's a key driver of profit growth.
In May, Sonic announced that its organic growth in the four months to 30 April 2024 was "strong" at 6%. I think that is a solid growth rate for what's a rather defensive, stable area of the healthcare market.
There are a few tailwinds that can help the company including the ageing demographics in western countries, as well as increasingly advanced technology that could help unlock new revenue streams.
Acquisitions and investments
Sonic Healthcare earned a lot of profit during the COVID-19 pandemic as it carried out millions of tests. This led to a significant amount of cash flow which the company has used to make a number of acquisitions such as SYNLAB Suisse and Dr Risch in Switzerland and PathologyWatch in the USA.
Sonic Healthcare is making significant investments in digital pathology and AI to unlock "upside opportunities".
Franklin.ai is a joint venture involving Sonic. The ASX 200 stock noted that 2024 will see validation studies and the launch of the first anatomical pathology AI product, supported by Sonic pathologists globally. Franklin.ai products will be deployed within Sonic and sold globally.
Sonic said that digital pathology and AI were set to "transform anatomical pathology through step-change gains in efficiency, quality, capacity and workflow optimisation."
Profit to improve?
The ASX 200 stock expects to report earnings before interest, tax, depreciation, and amortisation (EBITDA) of approximately $1.6 billion in FY24. The company then predicts EBITDA growth of between 6.25% and 9.4% in FY25.
I think profit growth is the best way to encourage investors to pay more for Sonic Healthcare shares.
Currently, the estimates on Commsec suggest the company's earnings per share (EPS) could rise by 32.5% between FY24 and FY26. With the ASX 200 stock trading at 20x FY26's estimated earnings, I think there is good scope for the business to deliver good capital growth over the next two or three years.
