Where to for Australian healthcare stocks as inflation bites

Platypus has always liked the health sector because it provides earnings certainty and offers defensive and quality characteristics that appeal to investors when there’s heightened uncertainty and a complex economic outlook.

We see the market continue to overlook these attributes with healthcare underperforming despite increased market volatility and uncertainty—providing compelling opportunities for investors.

While valuation risk for the big names remains a risk, the current annual earnings for CSL Limited and Cochlear Limited are negatively impacted by COVID disruptions. We believe this valuation risk is overstated especially when you consider that earnings were predominantly impacted by lockdown restrictions, not the result of the virus itself.

Provided we don’t see another deadly COVID variant, or a variant for which current vaccinations don’t offer protection, this sort of disruption should not recur with earnings growth expected to return to a more normal level.

Inflation outperformers

Stocks that are likely to outperform in a rising inflationary environment have strong and non-discretionary demand, which gives them strong pricing power.

A number of companies across different industries have re-priced for cost inflation in recent times, however, to do this consistently without any push back from customers and decline in volumes, there has to be a strong, non-discretionary, sustained demand.

Three healthcare companies fit this description — CSL Limited, Cochlear Ltd, and Resmed Inc. Each business has strong pricing power backed by non-discretionary, sustained demand.

Other important attributes to look for in a company in a rising inflation environment include:

- a strong balance sheet so that the company can continue to invest in important initiatives despite its own inflationary pressures

- a company’s ability to help itself or to maintain its cost leadership within its own industry – this allows companies to price more attractively than their closest peers, solidifying demand from their customers further.

A word on Ramsay Health Care

The recently announced takeover bid for Ramsay Health Care shows that resilient earnings, non-discretionary and growing demand and aging demographics with pricing power are attributes that Private Market buyers are attracted to. We see other Australian healthcare stocks showing similar characteristics to Ramsay Health Care.

Have a Healthcare Check

For investors concerned about inflation, volatility and economic uncertainty it may pay to not ignore Australian listed healthcare companies – many of which are global leaders. We have provided some examples here, but there may be others that warrant a closer look in the current environment.