When economic uncertainty is high because of geopolitical issues between Russia and Ukraine, regulatory crackdowns in Asia and spiralling inflation and supply constraints throughout the world, it’s a smart move to buy large and reputable companies that represent great value and whose services or products are going to be consumed irrespective of the events happening around us.
Sonic Healthcare (SHL) is one of the world’s leading providers of medical diagnostic services, such as radiology and ultrasound, and is the world’s third largest provider of pathology services. SHL is well established globally, being the largest private pathology operator in Germany, Switzerland and the UK, and is the second largest in Belgium and New Zealand and the third largest in the USA.
An essential revenue generating activity for SHL is its pathology services. Pathology tests play just about the most crucial role in our modern healthcare system where it’s estimated it influences approximately 70% of all healthcare decisions; talk about a recurring revenue stream for SHL, regardless of the type of illness or disease.
SHL share price has fallen 25% this year due to the market factoring in an expected decrease in COVID testing volumes, which will reduce the company’s profitability. COVID contributed to significant revenue and earnings boosts for SHL, yet its core business activities still made up more than 75% of its total revenue over this period. SHL achieved a record profit of A$1.3 billion last financial year on revenues of A$8.8 billion.
The fall in SHL share price has been exaggerated in our view, thus representing a great opportunity to buy an exceptional business at a discounted price. Even management thinks the same after announcing they will conduct an on-market share buyback for up to $500 million over the next 12 months.
With “Long Covid” likely to impact a large percentage of humanity, we anticipate SHL is going to be a major beneficiary as doctors send their patients off to get every test under the sun. We don’t believe the market is pricing this in at all..… SHL is trading on a P/E multiple of 11.45 in comparison to Australia’s healthcare industry of 28.8, further indicating an undervalued stock.
BUY last sale $35.50