CSL, SHL, RMD & RHC remain our preferred healthcare names.
Resmed is looking a little expensive and we’d like to repurchase on the next retracement.
Sonic Healthcare: we expect 5 – 8% EPS growth and consider this a good buy/write addition to portfolios.
Ramsey Healthcare – Accumulate with $74 price target
CSL: 15 – 20% EPS growth remains attractive and adding a covered call option enhances the yield.
CSL
MPL, SHL & CSL are worth adding to your watch-list. We see the current price levels in these names, at or near new buying support.
CSL’s FY17 NPAT guidance implies US$1.38b net profit after tax.
The company has purchased 1.4m shares during 2HFY17, of the $500 million share buy-back program.
With the stock price now trading 28x FY18 earnings, much of the good news is priced in. FY18 revenue $7.2b, EBIT $2.2b, forecast net profit up 20% to $1.7b, EPS US$3.60, DPS US$1.75 places the stock on a forward yield of 1.8%.
We remain attracted CSL and look for the next Algo Engine buy signal to provide a discounted entry point.
CSL trades 27x forward earnings.
FY18 revenue to grow 5% to US$7b, EBIT +18% to US$2.2b, EPS US$3.60 & DPS US$1.70.
This places CSL on a forward yield of 1.8% into FY18.
We own CSL and recommend a covered call into the $130 range to enhance the yield.
Cochlear was recently triggered by the Algo Engine as a buy signal and we update our 12-month share price target to $138 based on a PE of ~27.5x. and a forward yield of 2%.
Risks remain associated with COH reimbursement changes, regulatory
intervention and adverse currency movements. However, momentum favors the stock at present.
The share price of CSL jumped almost 14% to $115.90 this week after surprising the market with a big earnings upgrade.
After posting a first-half profit of about USD 800 million, CSL expects net profits for the year ending June 30th to grow between 18 to 20% on a constant currency basis. This forecast included a USD 20 million headwind from unfavorable currency conversions in the AUD/USD.
However, as positive as the headline and resultant share price rally appear, we suggest that this earnings news needs to be considered within a broader context.
18 months ago the F17 NPAT expectation was $ USD 1.7 billion, 6 months ago it was USD 1.5 billion and the first estimate 2 months ago was USD 1.28 billion.
In essence, this week’s news that the profit outlook has been raised to USD 1.33 billion is considerably lower than the earnings figures that CSL was expecting just 6 months ago…….yet the share price has moved from $90.00 to $114.00.
Based on industry assessments about potential pockets of competition within the immunoglobulins area, the forward earnings trajectory could be revised again over the next few months.
As such, we consider CSL in the $114.00 to 120.00 price range to be full-valued.
Our Algo Engine triggered a buy signal at or near the recent lows of $92.
At this point in the market we prefer healthcare names as a sector allocation for new money. Here are the recent buy signals generated by our Algo Engine.
With SHL, CSL and ANN we’ve added covered calls to boost the annualised cash flow to over 10%, whilst still allowing for capital growth if exercised at the strike price of the sold call.
Healthcare names are being sold off due to their high PE ratios and negative sentiment towards the sector, which is permeating from the US healthcare stocks leading the sell off.
Keep these on your watch list as the selling will likely exhaust and we’ll look for entry levels triggered by the algo engine.
The algo engine has triggered a number of ASX signals in the last 48 hours. CSL has sold-off and is worth watching, the other theme is the potential short in the insurance names IAG & SUN.
We’ll be looking at these trades next week.
Within the current sell-off Resmed, Sonic Healthcare & CSL look like reasonable opportunities in a back drop of increased volatility. Here are the entry levels to add to your watch list.
Resmed (RMD.ASX) – Buy at $8.50 – $8.70 range
Sonic Healthcare (SHL.ASX) Buy at $20.50 – $21.00 range
CSL (CSL.ASX) Buy at $96 – $102 range
CSL.ASX reported FY16 revenue of $6.1b on EBITDA of $1.65b. The $500m share buyback is less than conducted in the previous 2 years but will still provide marginal buy side support to underpin the stock. In FY17 we see revenue growing to $6.5b and EBIT in the range of $1.8b suggesting the underlying business can continue to grow at around 12%. This places CSL.ASX on a 12 month forward PE of 27x with a yield of 1.4% assuming dividends per share of $1.30.
An okay result and a stable outlook underpins CSL as a buy write . We own it at lower levels in the model and generated significant call premium earlier in the year when selling December call options.
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