Why the Ramsay share price is climbing

The Ramsay Health Care Limited (ASX: RHC) share price is continuing its momentum today, up by 3.46% at the time of writing after providing 2 positive updates to the ASX this morning.

Ramsay announced it will provide support for the UK healthcare system for a 14-week period during the COVID-19 pandemic. This continues support it has been providing the UK National Healthcare Service (NHS) since 23 March. 

This new deal continues Ramsay’s strategy of making its private hospital beds available for public health sectors across Australia. Today, the company also announced it has finalised a deal with the Western Australian Government where, in return for maintaining full workforce capacity at its facilities, Ramsay will receive net recoverable costs for its services. 

On Friday, Ramsay announced a similar binding heads of agreement with NSW. Both Queensland and Victoria have already reached similar deals with the company.

Shoring up finances

The Ramsay share price finished last week up 5.3% from Monday’s opening price. Given today’s news and the market’s response so far, I believe it will continue its upward share price momentum. These agreements replace revenue the company had lost due to pandemic restrictions, in particular the cancellation of all non-urgent elective surgeries. The company wisely withdrew its FY20 guidance on 18 March in response to rising uncertainty in Europe particularly at the time. 

The deals over the past 4 to 5 weeks will cover the company’s costs. Also, the capital raising will shore up its finances and place it in a good position as we all emerge from lock down. 

Is the share price momentum justified?

At the time of writing, the Ramsay share price remains down by 8.65%, year to date. At this price, it is trading at a price-to-earnings ratio of 24.7. This is ~2 points higher than its 10-year average and underscores investors belief in the company as a growth opportunity. I personally think it is a great opportunity.

Ramsay has achieved high 10-year compound annual growth rates (CAGR) across all major valuation indicators. This marks it as a very well managed company with a product that is in demand.

Its performance includes a 12.9% CAGR in sales, a 42.4% CAGR in free cashflow and a 13.7% CAGR in earnings per share (EPS). 

Foolish takeaway

Ramsay is set to continue its share price momentum after striking a number of revenue replacement deals across Australia and now in the UK. This underscores the very strong management as shown by its historic financial performance. The company has delivered strong growth over a decade. 

More reading

• How to invest $5,000 in ASX 200 healthcare shares today
• 5 ASX 200 winners and 5 losers of the week
• These small cap ASX shares could be stars of the future
• 3 ASX healthcare shares to buy for strong long-term growth
• The next ASX sector in a post COVID-19 earnings upgrade cycle

Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ramsay Health Care 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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