The Ramsay Health Care Limited (ASX: RHC) share price has fluctuated between $60 and $70 since April this year.
RHC share price chart
Given the nature of the business and the effects of COVID-19, Ramsay shares are still sitting at an 18% discount to where they were at the start of the year. Is now a good time to buy?
Background
Ramsay Health Care is the largest private hospital operator in Australia, with operations also in Scandinavia, France and a major presence in the UK. Ramsay has been operating for more than 50 years, having been started by Paul Ramsay AO in 1964. The company has 480 facilities across 11 countries with 77,000 staff, annually treating around 8.5 million patients.
A slowdown in elective surgery globally has seen the company face a major roadblock this year, resulting in a 43% decrease in net profit in FY20 and a cancelled dividend for the year.
Around 60% of Ramsay’s EBIT comes from its Asia Pacific segment, so as long as our own economy continues to show signs of improvement, it seems likely that the company will be able to get by in the meantime despite the conditions overseas.
The potential vaccines are looking promising, but a full recovery in earnings may take a significant amount of time given the lag between a rolled out vaccine and elective surgery.
Are Ramsay shares good value?
I find it interesting that despite the uncertain outlook for Ramsay, its valuation is one that still reflects a growth stock with a trailing P/E ratio of 41x. Even forward-looking, I think the valuation appears stretched with fairly low expected earnings growth for FY21.
So, from a value perspective, I don’t think Ramsay shares are cheap, especially when you look at some of the other COVID-19 affected sectors here in Australia that are trading on much lower valuations, such as retail. I would argue some Aussie retailers have a better outlook than Ramsay in at least the short-term, but trade on P/E multiples of around 20 with much higher expected earnings growth within the next couple of years.
Summary
I can partially see the appeal in holding Ramsay shares to take advantage of the general re-opening of the global economy. But I also think there are some cheaper COVID-19 affected sectors on the ASX that have some decent growth potential as well.
For some more share ideas, click here to read: 3 ASX growth shares to watch closely in December.
