As markets roll with volatility in 2016, now more than ever is the time to focus on the huge global force of the healthcare industry.
For respiratory product producers Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) and ResMed Inc. (CHESS) (ASX: RMD) demand is still growing rapidly as populations age and China's middle class market grows.
But of the two companies it's Fisher & Paykel Healthcare that has been the true shooting star. Shares have rocketed 39% in the last 12 months, compared to ResMed's 7% rise:
The rise reflects Fisher & Paykel Healthcare's rapidly improving financial performance and growing margins. For the most recent six months the company grew revenue by 20%, compared to ResMed's 9% growth.
Fisher & Paykel Healthcare may be small and nimble relative to ResMed, but the improving results are the product of excellent long term planning and reinvestment. The company has lowered production costs by setting up manufacturing in Mexico and moving to a direct sales distribution strategy in the United States which helped to add almost 3% to the company's gross margin for the six months to 30 September, 2015.
Revenue growth is set to continue and the company anticipates full year operating revenue growth of 19% over the 2015 financial year to NZ$800 million. Within three years this is expected to top NZ$1 billion.
But with a current price-to-earnings (p/e) ratio of 35, compared to ResMed on 21, is FPH a better buy today?
If each continues growing at its respective current rate over the next three years, in my view investors could be reasonably indifferent between the two at their current values.
| ResMed Inc.¹ | Fisher & Paykel Healthcare | |
| Six month revenue growth | 9% | 20% |
| Gross profit margin | 58% | 63% |
| Price-to-earnings ratio | 21.6 | 35.5 |
| Current dividend Yield | 1.6% | 1.8% |
Source: Company announcements. Notes: ¹Qtr 4, FY15 + Qtr1, FY16
The two companies are subject to similar business risks, including currency exposure from the large percentage of earnings generated outside of Australia, and each company runs the perpetual risk of brand damage for unexpected product recalls.
However, the strong growth and increasing brand recognition of Fisher & Paykel Healthcare wins me over and I would be willing to pay the premium over ResMed to own the company.
Foolish takeaway
Fisher & Paykel Healthcare is a company I would love to own to gain exposure to the growing healthcare industry. It's a fantastic defensive, well run, high margin business with a rapidly growing market. It understandably commands a premium share price.
