After the plunge, is it time to dive in for Healthscope?
When the share price of Healthscope plunged 30% in October, we received numerous queries from many of our thousands of investors and readers. In short, they were asking: after a price dive like that, what did we think about the business now?
Our long term thesis for Healthscope remains unchanged by the recent admission of less than favourable growth in admissions and procedures for the first quarter of FY2017.
Of course, the selling of shares by senior management in August is obviously something that piques our interest. But their selling was prior to both the October announcement of softer trading conditions and prior to the September trading period to which the October announcement relates. We have also heard that the selling related to family planning matters, which if true would mitigate some of the more traditional concerns around transparency.
The healthcare sector has been the best performing stock market sector over the last five years, returning close to 160%, doubling the performance of the next nearest performer the Telco sector, and trouncing the performance of the All Ordinaries Index, which has only risen 25 per cent.
Investors’ returns however would have been even better served if they had ignored the advice of many experts at the time and simply bought major healthcare stocks, including CSL and Cochlear, when they fell on temporary hard times.
One might remember for example Cochlear’s global recall of its Nucleus CI512 device in 2011. The device was responsible for 70 per cent of the company’s revenue and the recall ultimately drove a 45 per cent collapse in the share price from its pre-recall price of $84 to $46. Today the shares trade at more than $126.00 after having recently touched $143.12.
Similarly, investors would remember the proposed $US3.1 billion ($3.87 billion) takeover of US-based Talecris Biotherapeutics Inc. by CSL. Telecris was, at the time, the third-largest producer of plasma medicines in the U.S, behind CSL. Ultimately however the takeover proposal was terminated because the US Federal Trade Commission announced the deal would be blocked. The termination cost CSL $US80 million after tax and the share price fell 32 per cent from a high of $41.50 to a low of $28.11 as faith in the deal dissipated. Today CSL trades at $100.00.
Our long term thesis for private hospitals in Australia remains intact. In 2014–15, there were approximately 10.2 million ‘separations’ in Australia’s public and private hospitals. Between 2010–11 and 2014–15, the number of separations in private hospitals increased by by 4.0 per cent. It is also worth appreciating that the aging population means the number of separations is growing at a faster rate than the population, which grew by just 1.6% annually over this period.
In 2014–15, about 41% of separations were for people aged 65 and over and while public hospitals accounted for the majority of childbirth separations (75%), private hospitals accounted for 60% of surgical separations.
Between 2010–11 and 2014–15, elective admissions involving surgery (of which there were 2.1 million in 2014-15) rose by an average of 2.4% per year, but by 1.3% for public hospitals and by 3.0% for private hospitals. While public hospitals provide 29 elective admissions involving surgery per 1000 population, for private hospitals that number was 58. In other words, private hospitals perform fully two-thirds of elective surgeries.
Prior to Healthscope’s announcement the high price in 2016 was $3.17 compared to today’s $2.25, a fall of almost 30 per cent and a price not far from the $2.10 price the company listed at in July 2014.
A 30 per cent share price decline is nothing short of a crash, and when it comes to the highest quality prospects, rarely does the market offer value by treating that which is temporary as permanent.
Our investors have also asked us lots of questions about Woolworths, and I will answer those in another blog post.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Andrew Mckenzie
:
Hi Roger,
Another healthcare stock I remember you talking about previously was Fisher and Paykel, I notice it has had quite a big pullback also and was wondering if you thought it was looking cheap?
simon
:
Hi Roger
let me guess are you long
HSO ?
and REA?
and ALU?
how can anyone have confidence in stocks that have 30, 40, 50% falls (BKL) ?
how can anyone have confidence in our market that is terribly brutal on overpriced growth stocks and even the ASX 200 ‘blue chips’ ?
I am constantly disappointed in the Aussie share-market which jumps from bull to bear monthly (but mostly bearish )
The international hedge funds must have a party every time they short our market as its so easy to make 10%++
Roger Montgomery
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Hi Simon, Buys stocks like you buy groceries. Look forward to severe price declines. It’s the market’s penchant for overreacting that makes it so useful for creating long term wealth.
simon
:
Hi Roger
yes to make money you have to buy low and sell high (not the other way around) but our market /ASX 300 performance is woeful and it suggests to me that something is very wrong in the ‘kansas’ that is our stock market.
I would love to know the under-performance of the ASX vs the out-performance of aussie property market for 2016 ?
greatest pairs trade??
One stock I cannot work out is ANZ
the market shorted it (correctly) down to $22.00 expecting a dividend cut, which it delivered then rallied on the bad news and bounced to $28 / a 27% bounce (wat the heck)
it just announced more bad new today /is up again (double wth).
ANZ has been the best performing bank on the ASX this 2H16 after paying mike smith $100mil (over 10yrs) to lose 40% of its market value in his last 12 months of tenure…!
David Oliphant
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So the intangible goodwil does not represent any amount of cash paid out of the business?
Roger Montgomery
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Not by the business in a time frame that is relevant to current investors.
Guy Davis
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Hi Roger, very thought provoking article as always, but I can’t get past the thought that HSO seems the antithesis of the quality business you normally back IMHO. I know you can’take invest through the rear view mirror but you will need some serious growth to justify single digit ROE, and even that took significant debt to achieve. Revenues only grew moderately this fy and operating margins were constant , so the only reason I could see for the higher Epson was lower capex which will only get them so far. I am only a rank amateur so what am I missing? Everything I’ve learnt, includong on this blog, has said to avoid the sort of super optimistice forecasts it would take to justify buying even after the fall.
Cheers, Guy
Roger Montgomery
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Single digit ROE is a function of intangible goodwill that came out of the float. Need to look at the return on tangible equity.
Guy Davis
:
Okay thanks. So the float was a terrible deal, but return on TA is now 30-35pc. That does mean that there debt is playing a very significant role in their returns too.
Ben Wortley
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Hi Roger,
I agree with you that HSO is a good company and has dropped significantly, but as you say, that doesn’t always mean good value. When it dropped I used your guide in Value-able to calculate the intrinsic value. I come up with $1.50. Am I missing something?
Ramesh Pillai
:
Any comments on Vita group’s (VTG) fall today of nearly 14%?
Roger Montgomery
:
We’d expect a speeding ticket. We’ve heard unlisted Telstra licensees have spoken to brokers about a Telstra licencee event last week. The ASX should take a closer look if true.
Kelvin Ng
:
Hi Roger, I think its the move into men’s lifestyle apparel that has the market spooked. Mystifying.
Kelvin
Roger Montgomery
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Nothing to do with it. Some Telstra licensees appear to have spoken to their brokers about the confidential conference with telstra last week. VTG referred to it in their response to the ASX’s speeding ticket.