Over the last five years, CSL Limited (ASX: CSL) and Ramsay Health Care Limited (ASX: RHC) have delivered truly staggering share price performance. While the ASX has risen by 23%, CSL is up by 160% and Ramsay has seen its valuation soar by 310%. Looking ahead, their performances look set to continue to be well ahead of the wider index, but which is the better buy?
Business models
Although the two companies both operate in the health care space, they are vastly different in terms of their business models. As a pharmaceutical company, CSL's performance is less stable than that of Ramsay and evidence of this can be seen in its profit warning from earlier in the year when the blood-products maker stated that full-year earnings would rise by 10% versus the previously guided figure of 12%. As such, shares in CSL dipped by just under 10%, but are now up to a similar level to where they were prior to the profit warning.
Ramsay, on the other hand, has a more stable business model. That's because the operation of private hospitals tends to be a steadier business and allows the company to have greater earnings visibility than CSL. That's not to say, of course, that Ramsay is immune to challenges. Earlier this year, for example, the tariffs in the French health care system were cut by around 2.5% and, as the biggest private hospital provider in the country, this is expected to have a sizeable impact on its bottom line over the medium term.
Growth Prospects
Despite this, Ramsay is expected to post earnings growth of 19.7% per annum over the next two years. While hugely impressive, CSL is set to perform slightly better as a result of its expected growth rate of 20.2% per annum in the same time period. Looking back, the two companies have similar track records of growth, with annualised net profit rises of over 20% being the norm over the last ten years.
Shareholder experience
As well as a superb earnings growth profiles, an attractive feature of both Ramsay and CSL is their low betas. This means that their share prices offer reduced volatility for their investors to go alongside the fact that the two stocks are relatively uncorrelated with the performance of the wider economy.
As such, even if the ASX experiences a volatile period and the Aussie economy endures a challenging time, both Ramsay and CSL could still perform well. In fact, their betas of 0.5 (Ramsay) and 0.6 (CSL) mean that they are both defensive stocks, with their share prices set to change in value by 0.5% and 0.6% respectively for every 1% movement in the wider index.
Valuation
Although Ramsay has a lower beta than CSL and a more stable business model, when it comes to valuation CSL is the clear winner. Certainly, both stocks trade at a substantial premium to the ASX in terms of their price to earnings (P/E) ratios, but when CSL's P/E ratio of 23.4 is combined with its excellent growth rate, it equates to a price to earnings growth (PEG) ratio of just 1.16. Meanwhile, with Ramsay having a P/E ratio of 29.9 it equates to a PEG ratio of 1.51.
And, while Ramsay's shares do still offer growth at a reasonable price, CSL appears to be worth buying ahead of it – especially if you can live with greater volatility over the medium to long term.
