Healthcare stands out in a depressed market

Its immunity to recession has helped it outperform the share index by far, writes Madeleine Heffernan.

Its immunity to recession has helped it outperform the share index by far, writes Madeleine Heffernan.

A fter 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 this year, versus a flat benchmark index. The standouts are the private hospital operator Ramsay Health Care and the blood plasma company CSL, which are 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.

As the industry veteran Robert Cooke recalls: "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.

"And as it turns out, I actually was right," says Cooke, who is the managing director of the private hospital, pathology and medical centre company Healthscope.

"Because I said to him at the time, 'I'm not a bank and I'm not a mine'."

As this week's better-than-expected economic figures demonstrated, 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, the founder and chief investment officer at Platypus Asset Management, says the sector's outperformance was kicked off by CSL's solid result in February.

"It's a defensive sector that has growth," he says.

"In the last 12 months, the healthcare index has traded at near-new highs, whereas obviously the market is nowhere near it. It's outperformed by about 30 per cent since the [global financial crisis] 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 with 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 past two fiscal years," Williams says.

"In fiscal 2010, '11 and the first half of '12, the currency headwind was circa 10 per cent for most of the large healthcare companies, and that's now dissipating."

Goldman Sachs lifted its one-year target price for CSL by 6 per cent last week 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 [immunoglobin] product," Goldman says.

But Morgan Stanley is more cautious on CSL. While it has 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," the analysts Sean Laaman and James Rutledge has 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 "refreshed" its view this week of the condom manufacturer Ansell following US and European Union manufacturing data, as well as industry feedback.

"While Ansell is not immune from 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," the analysts Dr Craig Collie and Amron D'Silva have said in a note to clients.

But those looking for further capital gains might have left their run too late.

As Tim Montague-Jones, a senior equity analyst at Morningstar, puts 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," says Montague-Jones, who runs the Morningstar Australia Growth Portfolio.

As soon as the market stabilises and there's a "vision" of global economic growth, money will be pulled from the sector, he predicts.

Although he considers healthcare stocks overvalued, he is favourable on the liver cancer treatment company Sirtex Medical.

Also attracting interest is the medical centre, radiology and pathology company Primary Health Care, which has missed the recent boom in healthcare stocks.

Dr Shane Storey, the healthcare analyst at Wilson HTM, says the market's polarised position on the company actually presents an opportunity for investors.

His "buy" rating - and price upgrade to $3.42, which is 65? above Friday's close - is built on expectations that recovery 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 says, and Medicare data suggest that Primary's other divisions, pathology and radiology, should also report solid results.

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