Why this top broker tips 20% upside for the Sonic Healthcare share price

Two happy scientists analysing test results.Two happy scientists analysing test results.

The Sonic Healthcare Limited (ASX: SHL) share price is edging higher today, up 0.24% to $32.84.

But like most ASX shares in 2022, it has struggled amid lower market sentiment as inflation and interest rates rise.

On the first day of trading this year, Sonic Healthcare shares closed at $46.14. So, the pathology provider has endured a 28.8% loss in share price value year to date.

Based on this, Sonic has underperformed its peers in the sector in 2022. The S&P/ASX 200 Health Care Index (ASX: XHJ) is down 16.7% year to date.

However, over the past 12 months, Sonic has outperformed the index, down 10.5% compared to 15.8%.

How do the experts view the Sonic Healthcare share price?

Top broker Bell Potter believes Sonic Healthcare is well-placed for growth. It points to the growing demand for pathology services and international expansion opportunities.

The broker said:

[Sonic is] the world’s third largest pathology provider with significant operations in the USA, United Kingdom, Germany, Switzerland, Belgium, Australia and New Zealand. Against the backdrop of continuing growth in the demand for pathology services over the longer term, the group has further international expansion opportunities in both existing and new geographical markets.

Another top broker, Morgan Stanley, doesn’t just say buy, it says go overweight on this one.

The team has put a price target of $40 on Sonic Healthcare shares, implying a potential gain of more than 20% in 12 months’ time.

The broker says Sonic has benefitted from massive COVID-19 testing. This boosted its earnings in FY21 and the broker is expecting the same for FY22.

Morgan Stanley also points out that Sonic’s base business revenue is also rising. HY22 base revenue was up 4.3% year-on-year and up 2.5% compared to HY20 (before COVID-19).

However, the team expects earnings to normalise in FY23. So, they value the Sonic Healthcare share price at 10 times FY22 estimated earnings and 16 times FY23 estimated earnings.

What else is happening at Sonic Healthcare?

In its half-year results for FY22, Sonic Healthcare revealed it had spent $585 million in acquisitions and joint ventures during the half. It plans to continue to explore further opportunities for expansion.

CEO and managing director Dr Colin Goldschmidt said:

During the half-year Sonic invested A$585 million in acquisitions and joint ventures that will enhance the future growth of the company. The acquisition of Dallas-based ProPath has significantly strengthened Sonic’s anatomical pathology operations and management in the USA, whilst the acquisition of Canberra Imaging Group has materially expanded the revenue, footprint and talent of Sonic’s Radiology division.

Our strategic investment into Harrison.ai and the establishment of a pathology AI joint venture is a very exciting step for Sonic. Harrison.ai is a leading global healthcare AI company and we believe that the combination of Sonic and Harrison.ai, through our joint venture, will be a powerful force in developing best-in-class AI diagnostic tools for pathology.

Sonic’s global management teams continue to focus on identifying and assessing synergistic acquisitions and outsource contracts. Sonic is well positioned to continue to invest in and expand the business with an active pipeline of opportunities under evaluation, backed by a very strong balance sheet.

What about dividends?

As my fellow Fool Tristan reported recently, Sonic has a ‘progressive dividend policy’.

This has led to the company increasing its dividend every year for approximately a decade.

Most recently, Sonic Healthcare upped its interim dividend by 11% to 40 cents per share.

And it was 100% franked too, which is not usual for the stock.

The post Why this top broker tips 20% upside for the Sonic Healthcare share price appeared first on The Motley Fool Australia.

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Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Sonic Healthcare Limited. 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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