Sonic shock

Unexpected fee cuts and weak global economic growth hit Sonic

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published February 19, 2013 12:21 pm AEDT

Pathology and medical diagnostic services company, Sonic Healthcare Limited (ASX: SHL) has reported a 5% increase in net profit for the six months to December 2012, to $151 million. That comes on the back of a 3.4% rise in revenues to $1.73 billion, compared to the previous period. The high Australian dollar impacted revenues to the tune of $36 million – which is not all that much as a percentage of total revenues.

Earnings per share came in at 39.5 cents, a 4.4% rise over the previous year. Sonic increased the interim dividend by 1 cent to 25 cents, partly-franked.

While that all appears to be a fair to decent result, investors weren't happy, sending the shares down over 7% in early morning trade.

And it wasn't hard to figure out why.

Sonic downgraded its full year forecast, expecting growth in earnings before interest, tax, depreciation and appreciation (EBITDA), to come in at the lower end of its previous guidance of 5-10%. Growth in the US has been much lower than expected, falling 2.1% on a constant currency basis, impacted by Superstorm Sandy, unexpected Medicare fee cuts and the weak economic environment. In Europe, several customers have short paid the company to the tune of €16 million, and Sonic is pursuing recovery of these.

Like other operators in the highly regulated healthcare space such as Ramsay Health Care Limited (ASX: RHC), Primary Health Care Limited (ASX: PRY) and Sigma Pharaceuticals Limited (ASX: SIP), Sonic's revenues and earnings depend on government policies to a large extent. When these change, as in the US and Germany recently, earnings can take a hit.

Foolish investors need to bear that in mind when considering an investment in this sector.

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