What: Shares in Sonic Healthcare Limited (ASX: SHL) were dumped in morning trade, down more than 5.5% while the S&P/ASX 200 Index (ASX: XJO) (Index: ^AXJO) is slightly off 0.43%. The healthcare company announced at its annual general meeting that it revised EBITDA growth guidance for FY 2015 from 5% down to 2% – 4%.
That didn’t sit well with investors, even though the company hit a new all-time high of $19.30 earlier this month. Currently the stock is around $17.37. So what: In the company’s trading update for October year-to-date, it said its Germany, UK, Switzerland, IPN (Independent Practitioner Network) and Imaging segments showed strong performance. However, in Australia several issues have sapped growth such as:
1) Low market volume growth in the first quarter, yet recovering in the second
2) Cost of running pathology collection centres is rising
3) And unexpected, targeted Medicare fee cuts in November
In addition, the US business volume growth continued to rise, yet revenue growth was lower.
Because of these, EBITDA growth will be flat in 1H FY2015 and is expected to improve in the second half, weighting growth strongly to that half.
In FY 2014, full year earnings rose around 13%. Consensus analyst forecasts were indicating an average 8.9% annual earnings growth over the next two years. We’ll have to see how the forecasts may be adjusted. Now what: Sonic Healthcare does have some growth initiatives coming from such things as a joint venture with the University College London Hospital/Royal Free in the UK to provide pathology services for 10 years. That is to start in early CY 2015.
Also, it announced it will provide laboratory services in the Edmonton area, in Alberta, Canada. Alberta’s public healthcare system is privatising some services, so if successful, there is an option to extend the contract to cover Northern and Central Alberta.
This may also occur in other Canadian states, giving Sonic Healthcare an opportunity to expand its business further.
As you can see, the company does have good prospects over the near-term. Unfortunately, temporary situations have set back earnings guidance.
Fortunately for long-term investors, this can be a chance to buy a quality stock on weakness. It is the largest medical diagnostic and pathology service provider in Australia and now operates in nine countries. The stock pays a 3.8% partially franked yield and has a good track record for past earnings growth. Investors should watch this stock closely for first-half earnings results and consider adding a position.
SHL Price at posting:
$17.18 Sentiment: None Disclosure: Not Held
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