As long as you've got your health
AFTER years of being overshadowed by resources and banks, listed health companies are in something of a sweet spot.
AFTER years of being overshadowed by resources and banks, listed health companies are in something of a sweet spot.The healthcare sub-index is up 16 per cent for the year to date, versus a flat benchmark index. The standouts are private hospital operator Ramsay Health Care and blood plasma giant CSL, which have been among the top 20 best performers over the past one, three and 12 months.Healthcare's reputation as a haven during uncertain economic times underpins the sector's good fortunes."Ten years ago, I argued with a rem [remuneration] committee chairman that the best way for me to get a bonus would be for there to be a recession," recalled industry veteran Robert Cooke."And as it turns out, I actually was right," Mr Cooke, managing director of private hospital, pathology and medical centre company Healthscope, said this week."Because, I said to him at the time, I'm not a bank and I'm not a mine."As last week's better than expected economic figures show, Australia is far from being in a recession. Still, the country and the sharemarket remain unable to shake off fears about the global economic outlook.Don Williams, founder and chief investment officer at Platypus Asset Management, said the healthcare sector's outperformance was kicked off by CSL's solid result in February."It's a defensive sector that has growth," he said."In the last 12 months, the healthcare index has traded at near- record highs, whereas obviously the market is nowhere near it. It has outperformed by about 30 per cent since the GFC started. We'd argue it's a good long-term place to be overweight because there is growth that is consistently higher than the market, and they're generally better quality businesses than the industrials."Adding to healthcare's appeal is the recent fall in the Australian dollar to below parity against the US dollar."A big reason for the outperformance recently is the fact that the growth of these companies is much less affected by the currency looking forward then it has been over the past two fiscal years," Mr Williams said."In fiscal 2010, 2011 and the first half of 2012, the currency headwind was circa 10 per cent for most of the large healthcare companies, and that's now dissipating."So, I guess you've got the combination of people buying it for safety, and also the fact that the growth in Aussie dollars is not being hindered by currency."On the analyst side, Goldman Sachs last week lifted its 12-month target price for CSL by 6 per cent and updated its earnings-per-share estimates, in line with the weakened local currency.It retained a "neutral" rating on the company, although the $39.80 price target is higher than Friday's close of $39.24."The outlook for CSL remains positive given efficient plasma economics, [rival] Baxter's capacity constraints, and strong growth from CSL's market-leading subcutaneous Ig [immunoglobulin] product," it said.But Morgan Stanley was more cautious on CSL. While it lifted its earnings-per-share estimates and price target, the revised $36.28 target is still below CSL's current price."The stock remains an FX and balance sheet play in our view," analysts Sean Laaman and James R. Rutledge told clients."We believe CSL is in a transition phase from a high-growth beneficiary of industry consolidation to a steady business with risk to longer-term margins as competition in the market for coagulation factors intensifies."Similarly, Macquarie this week "refreshed" its view of condom manufacturer Ansell on the back of US and European Union manufacturing data, as well as industry feedback."While Ansell is not immune to the current slowdown, we still see it delivering 12 per cent earnings-per-share growth this year testament, we believe, to the strength and resilience of its business model and competitive positioning," analysts Craig Collie and Amron D'Silva said in a note to clients.But those looking for further capital gains may have left their run too late.As Tim Montague-Jones, senior equity analyst at Morningstar, put it: "There's a lot of hot money in the healthcare sector.""It's a great sector and they've all done extremely well, but there has to be a time when you need to take some profit. We wouldn't be buying into it now," said Mr Montague-Jones, who runs the Morningstar Australia Growth Portfolio.As soon as the market stabilised and there was a "vision" of global economic growth, money would be pulled from the sector, Mr Montague-Jones predicted.He added that although all healthcare stocks were now overvalued, he was favourable on liver cancer treatment company Sirtex Medical.Another company attracting interest is the medical centre, radiology and pathology company Primary Health Care, which has missed out on the recent boom in healthcare stocks. Shane Storey, healthcare analyst at Wilson HTM, said the market's polarised position on the company actually presented an opportunity for investors.His "buy" rating and price upgrade to $3.42, 65? above Friday's close is built on expectations that recoveries in Primary's three major divisions will lead to a re-rating of the company later this year.Medical centre earnings will become a prominent feature of Primary's results over the next two years, Dr Storey said, and Medicare data suggests that Primary's other divisions, pathology and radiology, should also report solid results for the second half of 2012.
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