3 reasons why I think the Sonic Healthcare share price is a strong buy

Two researchers discussing results of a study with each other.Two researchers discussing results of a study with each other.

The Sonic Healthcare Limited (ASX: SHL) share price has rallied 20% in 2023 to date. I think there are a number of reasons to be positive about further potential growth.

The ASX healthcare share is a leading pathology company not just here in Australia but also in the United States, Germany, Switzerland and the United Kingdom. It’s building a strong position in radiology in Australia.

Healthcare is widely regarded as a defensive sector because people don’t choose when they get sick or need medical help.

Sonic Healthcare, in particular, appears to be a solid business, and pathology is an integral part of the healthcare system.

I think the Sonic Healthcare share price can continue to deliver good returns from here for a number of different reasons. Let’s dig deeper.

Strong organic growth

A key part of a company’s ability to achieve good returns is the level of organic growth that it’s able to achieve. In other words, is the core business growing well without needing acquisitions?

COVID-19 testing revenue helped Sonic Healthcare deliver strong revenue and earnings but was unlikely to last forever.

So, is the non-COVID revenue growing well? Yes. In the first six months of the FY23 half-year result, the company’s ‘base business’ revenue grew by 6% year over year. January 2023 base business revenue saw 14% growth year over year.

A portion of that good growth may be explained by ‘catch-up’ testing now that life has largely returned to normal after the pandemic. But, the organic growth is very positive.

I think it suggests that net profit after tax (NPAT) can keep growing at a good pace, particularly if it can keep achieving increasing scale benefits. And that’s good news for the Sonic Healthcare share price.

Increased profitability, partly thanks to acquisitions

The ASX healthcare share is now much more profitable in the aftermath of COVID-19 disruptions.

Compared to the pre-pandemic period of the first half of FY20, the HY23 total revenue was 22% higher, earnings before interest, tax, depreciation and amortisation (EBITDA) was up 33%, operating cash flow was 47% higher, and NPAT had increased 50%.

Sonic has used acquisitions to grow the business in Australia and around the world, which adds to the company’s organic (market share) growth. For example, it recently announced the €180 million acquisition of Medical Laboratories Dusseldorf in Germany, which is expected to generate around €50 million of revenue in FY24.

I’m also excited by the company’s involvement in artificial intelligence, which could be very useful for future pathology.

Good dividend growth

The ASX healthcare share has a “progressive dividend” policy as well. In other words, it aims to grow its dividend each result for shareholders.

In the HY23 result, the business grew the dividend payment for shareholders by 5% to 42 cents per share at the current Sonic Healthcare share price.

Using the last two dividends, Sonic Healthcare currently has a grossed-up dividend yield of 4.1%. That’s a solid yield, in my opinion.

The dividends can provide regular and growing cash returns for investors, while profit can hopefully grow.

Foolish takeaway

Using the estimates on Commsec, the Sonic Healthcare share price is valued at 23x FY23’s forecast profit. I think that adds up to a good price considering its very defensive characteristics.

The post 3 reasons why I think the Sonic Healthcare share price is a strong buy appeared first on The Motley Fool Australia.

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More reading

Motley Fool contributor Tristan Harrison 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. 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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