Resonance Health Limited (ASX:RHT), a AUDA$8.45M small-cap, operates in the healthcare industry, which has experienced tailwinds from issues such as higher demand driven by an aging population and the increasing prevalence of diseases and comorbidities. Healthcare analysts are forecasting for the entire industry, a positive double-digit growth of 14.76% in the upcoming year , and a whopping growth of 42.00% over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. Today, I’ll take you through the sector growth expectations, as well as evaluate whether RHT is lagging or leading in the industry. View our latest analysis for Resonance Health
What’s the catalyst for RHT’s sector growth?
Integration with technology for more personalized and data-driven equipment, underpinning healthcare ‘internet of things’ has been a structural shift for the healthcare equipment providers. Over the past year, the industry saw growth of 0.96%, though still underperforming the wider Australian stock market. RHT lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means RHT may be trading cheaper than its peers.
Is RHT and the sector relatively cheap?
Healthcare companies are typically trading at a PE of 28x, above the broader Australian stock market PE of 17x. This means the industry, on average, is relatively overvalued compared to the wider market. However, the industry did return a higher 18.44% compared to the market’s 11.92%, which may be indicative of past tailwinds. Since RHT’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge RHT’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? RHT recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto RHT as part of your portfolio. However, if you’re relatively concentrated in healthcare equipment, you may want to value RHT based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If RHT has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the healthcare equipment industry. Before you make a decision on the stock, take a look at RHT’s cash flows and assess whether the stock is trading at a fair price.