Ramsay Health Care shares are up 33% in 12 months. Are they a buy?

Ramsay Health Care Limited (ASX: RHC) has seen its share price outperform the market over the last 12 months rising 35% to trade at $77.43 at the time of writing.

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The Ramsay Health Care Limited (ASX: RHC) share price has outperformed the market over the last 12 months, rising 33.68% to trade at $77.63 at the time of writing.

This outdoes the S&P/ASX 200 (INDEXASX: XJO)'s 12-month return of 19.93%, but lags behind the S&P/ASX 200 Healthcare Index (ASX: XHJ)'s return of 46.32%. 

A closer look at Ramsay Health Care

Ramsay Health Care is Australia's largest private hospital operator, with operations in more than 500 locations across 11 countries.

The healthcare industry benefits from an ageing and growing population – as people get older, they are more likely to require hospital admittance or increased healthcare. This isn't isolated to Australia, but is a global trend that Ramsay benefits from, largely thanks to its Capio acquisition in 2018. This acquisition positioned the company as the second largest private healthcare provider in Europe, with market-leading positions in both France and Scandinavia.

Ramsay generates more than half of its revenue overseas, giving it global earnings diversification to help shield it against country-specific risks. In fact, Ramsay's share price was deflated a year ago by fears of rising private health insurance costs and low revenue growth here in Australia – a drop that, in my view, could have been much worse if the healthcare provider didn't have a significant portion of its earnings overseas. Its recent share price growth is in part due to the share price recouping those losses.

Ramsay's growth

Back in FY17, Ramsay achieved core earning per share (EPS) growth of 7.8%. At this stage, it also forecasted core EPS growth of 8–10% for FY18. In FY18, it missed this guidance to achieve a core EPS growth of only 7%. The company then forecast lower core EPS growth for FY19 of "up to 2%", with management citing challenging circumstances in the UK, slowing growth in Australia and a neutral outlook in France.

Now, FY19 saw Ramsay slightly exceed this target, achieving core EPS growth of 2.1%. However, this appears pretty low for a company that is trying to justify a price-to-earnings (P/E) ratio of around 28.

Foolish takeaway

I don't want to sound completely bearish about Ramsay. I think it has a lot to offer shareholders and deserves to trade at a premium due to its outstanding dividend history, market dominance, market tailwinds and diversified earnings. However, I'm a little worried it has been overdone by investors who expect increasing future growth or who are buying shares for its stable dividend income at a time of record low interest rates. I would be more comfortable buying Ramsay Health Care shares if it traded back down around a P/E of 20.

Motley Fool contributor Michael Tonon has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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