Healthcare is often viewed as a good defensive place to invest because it is relatively insensitive to economic cycles. Over the past 12 months the healthcare index has outperformed the market by ~19% led by a stellar performance from heavyweight CSL. In this episode our panelists look beyond this big name and deliver their views on five healthcare exposures.
The stocks discussed are Cochlear, Ramsay Healthcare, Medibank Private, Blackmores and Fisher & Paykel Healthcare.
Ben Clark: Welcome to Buy, Hold, Sell. I'm Ben Clark and joining me today we've got James Miller from Firetrail, and Justin Braitling from Watermark. We're talking healthcare. It's a good defensive place to be in uncertain times. The healthcare index has outperformed the market by 19% over the last year, but can it continue?
Cochlear (ASX: COH)
We'll start with James with one of the bigger stocks, Cochlear. Buy, hold, or sell?
James Miller: Cochlear is a hold for us. Really it's about valuation. It's trading on 36 times price to earnings versus the market on 16 times and 10% growth in that implant space just doesn't cut it.
Ben Clark: Okay. Justin, buy, hold or sell on Cochlear?
Justin Braitling: I think it's a sell. The paediatrics segment has been fully penetrated. They need to drive adult population now, and that's a lot harder. They've done a good job, but you're not going to see any margin improvement there. The gig is up for growth. I think the growth ... The leaders are going to struggle from here.
Ramsay Healthcare (ASX: RHC)
Ben Clark: Okay. Sticking with you, Ramsay Healthcare. Struggled versus a lot of its counterparts. Buy, hold, or sell?
Justin Braitling: Well I think it's a hold now. The business is challenged; there's a lot of deflationary pressures, the insurance companies are squeezing them. Basically, they're trying to get people out of the hospitals. Hospitalisation rates in Australia are very high. Get them out of the hospitals, that keeps the claims expenses lower. So their top line is really struggling. They may be a GDP or GDP minus business going forward. But on 16/17 times, it's probably cheap enough to own. The money is going to come back into the defensive part of the market.
Ben Clark: James, you've got a view on Ramsay?
James Miller: Ramsay we think is one with earning risks, so it's a sell for us. It's really about what they're doing in Europe. They're really trying to expand aggressively there. We've seen them recently bidding for their European hospital operator, Capio, over there. That's the market where government budgets are constrained and that healthcare budget means revenue growth is pretty limited. So concerns around what they're doing there and their growth in the Australian business lagging as well.
Medibank Private (ASX: MPL)
Ben Clark: Okay, let's go to Medibank. Maybe one of the company's that's causing Ramsay a bit of pain. Buy, hold, or sell?
James Miller: We'll be a hold on Medibank. You're looking at a company which has got no earnings growth for three years, plus risks around a change in government and what that might mean for revenue caps there as well. Trading on 17 times PE, when you can get no earnings growth in the banks, and 12 times PE, we'll happily hold that one.
Ben Clark: Okay, Justin. Buy, hold, or sell on Medibank?
Justin Braitling: I think it's a hold as well, I would agree. I mean it's not clear what sort of claims inflation we're seeing in healthcare. Medibank's last result hospital claims are actually flat year on year. So they may actually be able to operate in a type of environment in terms of premium growth if Labour gets in and sticks to its 2% growth rate depending on what claims do. So it's not clear, they may be able to hold their margin. It's very well run, so it's probably a hold.
Blackmores (ASX: BKL)
Ben Clark: Okay. Let's go to some pre-emptive medicine. Blackmores. Buy, hold, or sell?
Justin Braitling: I think Blackmores is probably a hold I would say.
Ben Clark: Soft sell?
Justin Braitling: Soft sell. The business is trading well in China. But there are enormous risks obviously around the flow into China, the demand, vitamins and supplements is an area that is growing very quickly. But there's been a lot of disruption more recently in that channel, and I'm not sure that they'll not experience some disruption themselves.
Ben Clark: Okay, and James you've got a view on this one? It's been very volatile of late?
James Miller: Absolutely. It's something I want to sell but it's a hold for us. It would be a sell if it wasn't such a crowded short out there. I'm really more concerned about what's happening with the Chinese domestic vitamin manufacturers; they're making more inroads within their own market there and think about that and then there's cheaper ways to play the Chinese consumer as well, names like A2 Milk can be a cheaper way to play it.
Fisher & Paykel Healthcare (ASX: FPH)
Ben Clark: Yep, okay. Let's go across the ditch. Fisher & Paykel Healthcare. Been a great performer. Buy, hold, or sell?
James Miller: We'll hold that one. It's a simple as valuation. It's got two businesses, the consumer health business where ResMed and Phillips have got great products, pretty hard to compete at the moment. But the hospital business is growing. So I'd like to see both of them firing before we make a buy on that one.
Ben Clark: Okay, and Justin, Fisher & Paykel? Buy, hold, or sell?
Justin Braitling: It's a sell. The sleep business is struggling. You've had enormous consolidation of DMEs in the US, and they've gone to these new resupply agreements, which is going to make it very hard for Fisher & Paykel's next mask release to get any kind of penetration. The other business they've got, the humidification business, is very mature. There's not a lot of growth there. The exciting business, the high-fly business, the oxygen business, we think the market is really overstating the addressable market for that business. So on 36 times it's a sell.
Ben Clark: Okay. Well, it's been a great space to be in, but not very many buy ideas. So got to do your research.
Keep it up. It would have been nice to hear their views on CSL too.