The S&P/ASX 200 Health Care Index (ASX: XHJ) experienced a September quarter to forget, slumping over 10% since posting an all-time high in July this year. The fall comes as sentiment towards the healthcare sector turns sour with almost every constituent of the index posting a negative return for the last three months. It has been led down by big falls in Healthscope Ltd (ASX: HSO), Regis Healthcare Ltd (ASX: REG) and Cochlear Limited (ASX: COH).
Despite the broad-based pullback in healthcare stocks, two companies which I believe have a solid future ahead of them are CSL Limited (ASX: CSL) and Sirtex Medical Limited (ASX: SRX).
Here is why I rate them both as buys today.
CSL
As the biggest component of the S&P/ASX 200 Health Care Index, CSL's share price movement has a substantial bearing on the index's returns. With shares in the $46 billion behemoth plummeting almost 15% since reporting in August, investors are clearly becoming worried about the company's ability to continue earnings growth.
Slowing growth
In its 2016 full-year results, CSL reported statutory net profit after tax (NPAT) was down 11% on the prior year, with sales in its newly-acquired influenza vaccines business disappointing. Underlying NPAT rose 5% for the year, with management forecasting earnings per share to rebound by 14% in 2017. This should see shares head higher in the medium-term.
Increased competition
A caveat on the path to a higher share price is CSL's ability to stem the loss of market share to main competitor Baxter International Inc. On Wednesday, the American healthcare giant reported third quarter earnings of US56 cents per share, almost 27% higher than consensus estimates. Baxter's results were driven higher by increased sales across all business units, implying CSL could be losing market share to its rival.
Silver lining
The key to CSL's success in the past has been its ability to consistently report stellar earnings growth year-on-year (a trait which has seen it rise to become one of Australia's top 20 stocks by market capitalisation).
With the stock currently changing hands at a price-earnings of 26x, if management can meet guidance, I calculate CSL trades on a forward price-earnings of a touch over 22x. This makes it cheap by historical standards and thus a buy in my books.
Sirtex
Shares in cancer treatment outfit Sirtex Medical have slumped over 20% since reporting in August, as investors seemingly become nervous about the company's ability to maintain dose sales growth.
Although management reaffirmed the company is on track to meet "double-digit" sales growth over the 2017 financial year at its AGM on Tuesday, the broad guidance range does little to assuage fears of the company's growth prospects.
Risk factors
The drop in share price appears to be guided by the fact that Sirtex is a one-trick pony, with its only product being its liver cancer treatment, the SIR-Spheres.
If any of Sirtex's current research studies perform poorly, sales in its only product could be severely impacted, pushing Sirtex's share price lower. Accordingly, buying shares in Sirtex is definitely not for the faint-hearted.
Buying opportunity
Nevertheless, once investors acknowledge the risks associated with Sirtex, it's hard to look past Sirtex's solid growth prospects.
With the stock trading on a tantalising forward price-earnings of around 23x, I believe the current share price adequately compensates investors for its associated risks and provides strong upside potential if its development pipeline produces positive results. This makes it a buy in my opinion.
