The thematic of health services holds definite appeal for many investors seeking out a great combination of above average growth profiles with enticing defensive characteristics. The one sticking point is price – many health care stocks including Ramsay Health Care Limited (ASX: RHC) trade at significant premiums to the market. While a premium would appear justified, the extent of the current premiums being paid for some health stocks is arguably excessive.
The pricing of health care stocks can mean they might remain on your watch list rather than in your portfolio, however, recent share price weakness in the following three stocks could be offering long-term investors an opportunity…
Sonic Healthcare Limited (ASX: SHL) – Sonic's share price has slipped around 8% in the past week with the group releasing a profit update that confirmed full year earnings before interest, tax, depreciation and amortisation would be between 3% and 4% below previous guidance. The explanation for the reduced guidance was lower volumes in the Australian Pathology market and an escalation of specimen collection infrastructure costs.
Primary Health Care Limited (ASX: PRY) – Primary's share price has declined 8.3% in the last three months with a major contributing factor to the decline being the announcement of a reduced outlook for earnings in financial year (FY) 2015. This was driven in part by weaker-than-expected patient volumes in the fourth quarter.
Capitol Health Ltd (ASX: CAJ) – The share price of Capitol Health has declined 13% over the past three months despite the radiology provider announcing a record half-year profit which saw the group increase the dividend by 50%.
According to consensus data provided by Morningstar, Sonic, Primary and Capitol are currently trading on FY 2016 price-to-earnings (PE) multiples of 17.6x, 17.2x and 24.8x respectively. In comparison, the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO) is trading on a forecast PE of 18.1x. Given the solid earnings growth outlook for Sonic and Capitol over the next few years these two stocks look particular interesting at current prices.
