##{"id":61171,"date":"2013-01-23T14:24:35","date_gmt":"2013-01-23T03:24:35","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2013\/01\/23\/healthcare-is-expensive-may-be-time-for-profits\/"},"modified":"2013-01-23T14:24:35","modified_gmt":"2013-01-23T03:24:35","slug":"healthcare-is-expensive-may-be-time-for-profits","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2013\/01\/23\/healthcare-is-expensive-may-be-time-for-profits\/","title":{"rendered":"Healthcare Is Expensive, May Be Time For Profits"},"content":{"rendered":"

\n\t-Healthcare sector expensive
\n\t-Need to view stocks individually
\n\t-Disparity with public health exposure<\/strong>
\n\t <\/p>\n

\n\tBy Eva Brocklehurst<\/span><\/p>\n

\n\tThe healthcare sector has become expensive. In Deutsche Bank's view there is limited earnings risk for the larger healthcare companies in FY13<\/span>, as strong demand from the ageing population and relatively stable funding underpin the attractive earnings outlook. CIMB<\/span> has a Sell ticket on the larger capitalised<\/span> stocks but emphasises<\/span> the importance of looking at each individually rather than taking a broad sector view. In this broker's view, it may be time to take profits.<\/p>\n

\tCredit Suisse finds a disparity between the large healthcare companies unimpeded by government competition, such as CSL<\/span> ((CSL<\/span>)), ResMed<\/span> (( RMD<\/span>)) and Cochlear ((COH<\/span>)) and those subject to competition by the public health sector in Australia and overseas, such as Ramsay Health Care ((RHC<\/span>)) Sonic Healthcare ((SHL<\/span>)) and Primary Health Care ((PRY)). The broker notes, while the market is valuing most stocks on relatively similar levels, there is a large distinction in unleveraged<\/span> return on equity (ROE). Credit Suisse explains this as RHC<\/span>, SHL<\/span> and PRY, being subject to fewer competitive pressures and with lower risk operations, can gear themselves to a higher level than their higher quality peers.<\/p>\n

\tCIMB<\/span> continues to view longer-term sector drivers favourably<\/span>, as population growth, demographic shift in population age and innovation will underpin growth. However, near-term challenges remain, with slowing earnings growth and stretched valuations. There is also the potential for ructions if there is a change in the Australian government later in the year, given potential changes to private health insurance and recurring pathology funding negotiations. In the US there are weak utilisation<\/span> rates and structural reimbursement changes. CIMB<\/span> sees upside for PRY and downside for RHC<\/span> and COH<\/span>. The broker sees a defensive growth theme holding throughout the first half, with sentiment shifting toward capital appreciation and earnings momentum in the second half limiting strong sector gains.<\/p>\n

\tDeutsche favours<\/span> PRY, given its domestic focus, strong earnings growth profile and relatively attractive valuation metrics. Credit Suisse finds PRY should meet market expectations and has a Hold recommendation. In some ways the broker finds the stock overvalued but admits there's no near term catalyst that would result in a downgrade in rating. PRY is also a favourite<\/span> of CIMB<\/span>, hence a move to a Buy rating on improving profitability.<\/p>\n

\tMeanwhile, SHL's<\/span> funding pressures cloud its outlook, Deutschesuggests<\/span>, and growth will likely slow in in the second half due to funding cuts across all major regions. Credit Suisse sees the stock as overvalued relative to ASX200<\/span> on price\/earnings measures. On the FNArena<\/span> database SHL<\/span> has three Buy and five Hold ratings and its price target is comparatively narrow, from $13.45 to $14.55.<\/p>\n

\tFor CSL<\/span> attractive growth is fully priced and, given the recent guidance upgrade, Deutsche has little doubt it will deliver a remarkable first half result. Credit Suisse notes CSL<\/span> presents as materially undervalued proposition against the ASX200<\/span> and retains a Buy recommendation. CIMB<\/span> also finds upside potential for this stock. On the FNArena<\/span> database there are five Buy ratings, two Hold and one Sell (Citi<\/span>). Last month Citi<\/span> noted that good news was well priced in, before the potential has been realised<\/span>. The target range is from $45.33 (CIMB<\/span>) to $62 (Macquarie).<\/p>\n

\tRHC<\/span> has attractive growth and potential corporate activity reflected in a premium price, according to Deutsche, but the broker is confident the group can continue to deliver strong earnings growth for the foreseeable
\n\tfuture. Credit Suisse has a Hold on the stock while CIMB<\/span> sees it, along with CSL<\/span>, offering the most earnings certainty. Nevertheless, the broker believes it's probably time to take profits and has a Sell recommendation. Others on the FNArena<\/span> database with a Sell recommendation include UBS and Citi<\/span>.<\/p>\n

\tRMD<\/span> may surprise on the upside, according to Credit Suisse, in company with CSL<\/span> and RHC<\/span>, because of favourable<\/span> industry and market dynamics. The broker finds a case for being long RHC<\/span> and retains a Hold recommendation. Deutsche finds risk from competitive pressure and funding reform weighing on the outlook but continues to recommend holding the stock.<\/p>\n

\tThe one most at risk with a first half\/second half skew in earnings is Ansell<\/span> ((ANN)), according to CIMB<\/span>. Deutsche also expects tough economic conditions will weigh on the first half and relying on the second half to achieve guidance may test investor confidence. ANN is a mixed bag on the FNArena<\/span> database with three Buys, three Holds and one Sell.<\/p>\n

\tFinally, COH<\/span> is the wildcard stock in the sector, given a lack of earnings visibility, CIMB<\/span> maintains. Deutsche says it looks overvalued and first half earnings will likely contract due to falling upgrade revenues and a smaller FX hedge gain. Credit Suisse sees some risks with COH<\/span> but believes it is nearing undervalued compared with ASX200<\/span> stocks and notes it is cheaper than other healthcare stocks, bar CSL<\/span>.
\n\t <\/p>\n

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