Private hospital operator Ramsay Health Care Limited (ASX: RHC) has been a spectacular performer on the ASX for the past 15 years with a return of over 6,000%! It is one of those stocks that always appears expensive and many investors therefore find it difficult to buy. There have been few opportunities to buy the company after a share price fall as it does not happen very often. The recent drop in the share price may provide an opportunity for those investors looking to hold on for the long term.
Ramsay Health Care hit a high over $69 earlier this year and has now dropped below $60. That's a 14% drop when the underlying fundamentals of the business have not changed. Management have just reaffirmed upgraded guidance of earnings growth of 18-20% for FY15 based on the continuation of robust growth across all operations. It seems the stock has been sold off with the rest of the market and this has provided an opportunity to buy a quality business at a discount.
The company is currently trading on a price-to-earnings ratio of about 30 based on FY15 forecasts with a 1.5% dividend yield. While this looks expensive compared to the rest of the market, Ramsay has earned this valuation by being a strong performer for many years with an excellent management team.
The company has shown it is able to grow successfully through acquisition, brownfield expansion and organically. Ramsay Health Care currently operates 212 hospitals in 5 countries with over 25,000 beds and places. This gives the business good economies of scale and an excellent network of hospitals which has been growing steadily each year.
The long-term fundamentals of the private hospital market are attractive. As healthcare costs rise at a greater rate than inflation and government revenues, the public sector will likely be unable to keep up with demand. The global population continues to live longer thanks to new technologies and the demand for healthcare will continue to grow as more chronic conditions are treated for a longer period of time. This will place more pressure on the public sector and Ramsay Health Care is well placed to take advantage of this opportunity.
Foolish takeaway
I think the recent fall in the share price is a great buying opportunity for long-term investors. While the stock looks expensive, you are buying a high quality business that operates in a market which is growing globally each year. Ramsay Health Care has shown it can operate successfully overseas and provide shareholders with market-beating returns.
