With over 2,000 stocks listed on the ASX, it is tempting to gravitate towards over-simplified investment assumptions that reduce the "noise". For example, investing in a hospital owner and operator makes logical sense as society will always need to take care of its sick.
But there are a wide range of reasons why Ramsay Health Care Limited (ASX: RHC) could be a stellar portfolio holding. Here are five of the best.
Own number one
There are several listed hospital and medical services operators on the local market, but Ramsay is undoubtedly the biggest. The company owns or operates over 210 large-scale hospitals, and treats some 3 million patients each year.
In the case of Ramsay, size brings expertise. The best qualified and most competent administrators and managers are generally attracted to the larger players in the sector, as they can apply their experience to ever-larger and more complex operations, and in turn, be rewarded for that knowledge.
In addition, size brings a better developed "collective memory" where lessons of the past are internalised into the company and drawn upon in the future.
Efficiencies of scale
Hospitals are resource intensive on two fronts: the cost of the labour and time of the medical professionals who work there, and the cost of the equipment and material used in them.
One of the basic principles of business is that purchasing things in higher volumes brings discounts. With the purchasing power of over 200 hospitals, Ramsay is in a better position to get discounts on everything from low value consumables for its diagnostic machines to high value equipment like MRI scanners.
Bargaining power
A growing feature of the healthcare market in Australia will be private health insurers striving harder to preserve their profit margins by bargaining harder to shift costs onto the hospital sector.
However, when a hospital provider controls as large a proportion of the market as Ramsay, the relative bargaining power of the parties is much different to when a powerful insurer negotiates with a boutique hospital operator.
A naturally growing market
Across the world, western populations are facing aging populations, as the proportion of retired people relative to the workforce increases. It is also a fact that as we age, we require more health care.
With substantial operations in Australia, France and the United Kingdom, Ramsay is well placed for this trend.
The Middle Kingdom
The People's Republic of China has undergone a seismic economic shift in the past few decades that will naturally lead to citizens demanding a better standard of health care. To this end, planning has begun to increase the level of private sector participation in the 7,500 hospitals across the nation.
Ramsay already has an early foothold in the Middle Kingdom, with a partnership with leading Chinese medical university, Jinan, to build and operate hospitals in a province which has a population four times the size of Australia.
Potential pitfalls
The business model of Ramsay is not without headwinds. Increased activism or unfavourable legislative changes by governments in any of the jurisdictions in which it operates can have an effect on profits. Examples could include if a national government mandates maximum allowable costs for certain medical procedures, or institutes costly new overtime loading for hospital staff.
In addition, Ramsay trades at a premium valuation to the market, meaning that any negative news will likely hurt the share price.
Foolish takeaway
Despite the potential headwinds, few stocks are as well placed for the coming decade as Ramsay Health Care, and if it is not on your watchlist, it really should be.
