This S&P/ASX 200 Index (ASX: XJO) healthcare share could be a bargain as long as COVID-19 remains in the community.
The Sonic Healthcare Limited (ASX: SHL) share price could be poised to boom in 2020 and beyond. With most people resigned to the fact that the pandemic will remain in the community until a vaccine is developed, testing facilities are going to continue being in high demand. As a result, companies like Sonic could benefit as testing for COVID-19 becomes a normal way of life.
Sonic’s role in the COVID-19 pandemic
Sonic Healthcare is the third largest provider of clinical laboratory services in the world. The company operates pathology and radiology services in Australia and seven other countries including the United States.
Sonic has played a key role in helping countries combat the COVID-19 pandemic. In the company’s recent FY20 report, Sonic highlighted that it had performed approximately 6 million COVID-19 PCR tests globally. The company noted that testing capacity will be increased in order to meet growing community needs.
In the US, Sonic noted that approximately 3 million COVID-19 tests had been performed with market leading turnaround times. In Australia, the company has conducted around 1 million tests, reflecting 20% of national testing.
How has Sonic performed in FY20?
This ASX 200 healthcare share recently reported an impressive performance for FY20. Sonic’s full-year result was highlighted by an 11.5% increase in underlying revenue of $6.8 billion. The company also reported a 6.5% increase in underlying net profit of $552 million and noted underlying earnings before interest, taxes, depreciation and amortisation (EBITDA) of $1.1 billion for FY20.
The company noted that revenue from COVID-19 testing had offset initial falls in base revenue. In addition, Sonic highlighted strong growth in organic sales across the board. Sonic’s US revenue was the highlight, surging 21% on a constant currency basis. The company’s earnings in the region received an extra boost following the acquisition of Aurora Diagnostics.
Should you buy this healthcare share?
Initially, the coronavirus pandemic saw a drastic fall in Sonic’s base revenue. With many people avoiding a visit to the GP, traditional pathology and diagnostic volumes declined.
In my opinion, the revenue that Sonic is generating from COVID-19 testing is a band-aid solution. This is because routine pathology and diagnostic services offer greater margins and are bigger profit drivers for the company. As long as Sonic continues to augment some of this lost revenue in the short term, however, the company should fare well. Sonic did not provide any annual earnings guidance for FY21 in its full year report. The company cited that the outlook is dependent on fluctuations in base business and COVID-19 testing revenues.
In addition to continued demand for COVID-19 testing, Sonic could also benefit from a vaccine for the virus. The company’s pathology labs could see a boom in demand as people test themselves for COVID-19 antibodies.
Overall, I believe the long-term outlook for Sonic remains promising and I would probably advocate buying shares in the company. However, the Sonic share price has rallied hard since March, so a prudent strategy would be to wait for a substantial pullback before investing.
In the mean time, another healthcare share to keep an eye on is Healius Ltd (ASX: HLS).
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More reading
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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Sonic Healthcare Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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