Pro Medicus: A decade of exceptional growth and sustained performance

Ten years ago, radiology software company Pro Medicus (ASX:PME) was trading at just 86 cents. Yesterday, with a share price of $149, investors have seen their money grow over 17,000 per cent in a decade.

The company supplies software technology used by radiologists (who are extremely expensive for hospitals to employ) for medical diagnoses, which also renders them more efficient.

The company says this about its products: “Visage RIS, working in tandem with Visage 7, drives your imaging operations with precision, ensuring your organisation is running fast and efficiently. Patients are scheduled with ease, maximising modality utilisation, while providing a powerful communications platform connecting staff and keeping patient care as your foremost priority. Flexible workflow connects radiographers and radiologists ensuring interpretations are completed timely, with attentive productivity, by the most appropriately trained, available radiologists.”

Importantly, Pro Medicus was held for a very long time in Polen Capital’s Global Growth Fund.

Two years ago, when the share price was $53, analysts thought Pro Medicus was one of the 44 most expensive stocks in the world. In September 2023, despite new contract wins and a share price of $83, the same research firm said the shares were expensive. Today, after reporting record revenues and profits (again) that same research firm believes the shares are overvalued. Interestingly, that hasn’t stopped an increasing number of analysts covering the company, which our partners at Polen Capital believe is one of the higher-quality companies available anywhere in the world.

It’s easy to fall into the trap of applying traditional valuation models to fast-growing companies, especially companies that can increase their returns on equity year over year and those with massive and even inestimable addressable markets. Even Warren Buffett, it can be argued, was applying the wrong valuation methodology to ‘See’s Candies’ when Charlie Munger had to convince him to think differently and buy it.

Pro Medicus’ full-year revenue was up 29.3 per cent to $161.5 million, and the second half showed no signs of slowing, with revenue up 28.5 per cent to $87.4 million. Importantly, second-half cash conversion improved, revenue growth from North America accelerated over the previous half, and margins improved.

Pro Medicus’ net profit after tax (NPAT) for the second half of 2024, came in at $46.5 million, up 39 per cent on the previous corresponding period. For the full year FY2024, NPAT grew 36.5 per cent, beating analyst estimates. On a constant currency basis and net of any hedges, the company reported yet another record NPAT.

Impressively, and a big reason for the strong second-half growth was earnings before interest and taxes (EBIT) margins of over 71 per cent, up from just under 69 per cent in the previous corresponding period.

There tends to be a second-half bias to margins because the company invests in a vital conference in the first half of each year. Importantly, the longer-term trend is for improving EBIT margins.

For the year to June 30, free cash flow conversion was close to 90 per cent, which is impressive, although investors should remember this can swing around. Meanwhile, the balance sheet remains robust.

Revenue growth for a pipeline of products will likely follow the path of previous products, ensuring continued growth for those who are patient. The company enjoys a high level of recurring revenue, a large and growing addressable market and proven management running the business. By way of demonstration, Pro Medicus announced a plethora of new contracts in the latest half. This will likely continue, but only the bigger contracts are likely to be announced because the base will be bigger, and thus, those that qualify as market-sensitive must also be larger. Meanwhile, the client retention rate is 100 per cent, with CEO Sam Hupert having no client losses in the last year.

Inevitably, companies like this will disappoint, not because they have not done anything wrong. The disappointment will stem from the analysts themselves becoming unduly optimistic and then impatient when a company misses their unreasonable expectations. That will be the time to add this company to your portfolio.