Investors don't have to panic over Sonic Healthcare Limited (ASX: SHL) profit downgrade with the medical diagnostic facilities operator trimming its 2014-15 net profit by $15.6 million.
This is a great way to issue a profit warning. Sonic had lowered its profit guidance ahead of its full year result last month when it posted a 5.6% drop in net profit to $363 million for the year ended June 30, 2015.
The profit is actually worse than that as Sonic has given up hope of collecting €15 million in reimbursements from German state-based associations (called Kassenärztliche Vereinigungen or KVs) for quarterly billings up to the September 2012 quarter after the German court ruled against one of its competitors who was also chasing payment.
This means Sonic's bottom line was overstated by 4.3% on an after-tax basis although investors will be relieved that this one-off charge will not impact on the company's 2015-16 guidance for around a 20% increase in revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) based on the same exchange rates as in August.
Markets may be forward-looking but investors still won't like the news as Europe is seen as a one of its pillars of strength offsetting a sluggish Australian market that is plagued by rising costs, Medicare cuts and a slowdown in patient growth.
Reimbursements from KVs are subject to annual caps and there may be some concern about the situation repeating for Sonic down the track.
The good news is that its US operations are still expected to deliver strong growth momentum thanks to universal coverage from the "Obama-care" reforms, and there's already quite a bit of bad news priced into Sonic's share price after its 11.3% drop over the past three months.
I am not saying there is no further downside risk, but I think you will find good buying interest if the stocks fall another 10-15% from current levels.
The stock is down 1.3% to $18.92 in late morning trade compared with a 0.4% slide in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
Sonic is worth keeping an eye on, but I won't be buying the stock at this moment. There are better opportunities in the sector such as hospital operator Ramsay Health Care Limited (ASX: RHC), blood products maker CSL Limited (ASX:CSL) and fertility treatment provider Monash IVF Group Ltd (ASX: MVF).
