Test results are in, healthy growth diagnosed

The stock in focus this month is Sonic Healthcare (SHL). In a recent series of presentations focused on demographic factors and how they can impact investing, one sector that has enjoyed ongoing tailwinds from the demographic trends of an aging population and improving technological advancements has been the healthcare sector. Sonic is a medical diagnostics company that provides a comprehensive range of pathology and diagnostic imaging services to medical practitioners, hospitals and their patients. The company is very diverse in its operations, with significant presence in Europe, America and the Asia Pacific.

Sonic has grown both organically and by acquisition in these markets and this looks set to continue. Increased volume should help boost margins, given economies of scale will assist with reducing pathology testing costs.

While healthcare stocks in general have been excellent performers in recent periods one area to take into account when forming an investment decision is the highly regulated nature of the industry. This was highlighted for Sonic with recent changes in the rebate schedule for lab fees in the US. With most government balance sheets stretched to (and often beyond) capacity, there is a heightened risk of cuts in government subsidies and programs. However, given the importance of the healthcare sector, we expect these cuts to be offset by governments outsourcing more services.

With only 28% of their revenues being generated in Australia, Sonic will benefit from any weakness in the Australian currency and, with its number one market positioning in pathology in Australia, Germany, UK and Switzerland, the company is in a strong position to grow earnings and shareholder returns in the medium term.

Quick Stats:

• #1 market position in Australia, Germany, UK, Switzerland
• Forecast 20% revenue growth in FY16
• Balance sheet capacity for future acquisitions