ResMed Inc. (CHESS) (ASX: RMD) and CSL Limited (ASX: CSL) have consistently outperformed the broader market over the last decade and rewarded long term shareholders with enviable returns. Both companies operate in the lucrative international healthcare market and have competitive advantages over many of their rivals. ResMed and CSL also trade at a significant premium to the rest of the market and some investors may question whether or not this is warranted as several factors have impacted each company's outlook recently.
CSL Limited
CSL is a major player in the international biopharmaceutical sector. It is a key innovator in new therapies and owns a diversified portfolio of established and potential treatments. The long-term outlook for the business is positive with the market for blood therapies growing strongly each year. CSL is constantly entering new markets around the world and also developing high margin products for specialty and rare diseases. It also has manufacturing scale which minimises costs and maximises margins.
The major issues facing CSL are increasing competition and the necessity of new product approvals as old products come off patent. While this has not been a major issue in the past, there are concerns that CSL may lose some market share as new entrants compete in this lucrative market.
With shares trading at around $90 and a price-to-earnings ratio of around 24, I think the shares of CSL are fairly priced. The company is forecasting for around 10% profit growth for FY15 which is well below its historical average. There is no doubt CSL deserves a premium to the rest of that market due to the fact it is a proven performer and has a management team which is shareholder focused. A lower Australian dollar and the $950 million buy-back which is underway will support earnings per share growth in the short term and help support the share price. With an ageing population, CSL should benefit from a growing demand for its products in the longer term.
ResMed Inc.
ResMed has also been one of Australia's best performing healthcare stocks over the past 10 years. It is a global leader in the innovation and production of devices to help treat sleep related conditions. With many chronic conditions now being linked to sleep disorders, ResMed has a huge opportunity to increase the pool of people it can treat. The possible target market for ResMed is extraordinarily large with many patients yet to be diagnosed or treated. The company has been working hard to increase awareness of the disorders and making treatments more acceptable and accessible to patients.
ResMed found itself out of favour earlier this year based on disappointing trial results which were supposed to offer a new target market for its devices. The share price has recovered slightly since but I believe still offers reasonable value to investors.
A large proportion of ResMed's earnings are generated overseas and a lower Australian dollar will be a tailwind for the company. The outlook for ResMed is positive and with a proven track record I am confident management will be able to deliver strong returns for shareholders.
Foolish takeaway
At the current share prices I believe ResMed offers slightly more upside potential. I think the market over-reacted to ResMed's disappointing trial results and will slowly regain confidence in the company as it re-focuses on its excellent growth prospects. There is no doubt I would be happy to be a shareholder in both companies and any investor who is looking for global healthcare exposure should consider both as serious investments in their portfolio.
