In part two of our Healthcare sector update with Daniel Moore, Senior Equities Analyst and Portfolio Manager at Investors Mutual, Daniel discusses those stocks that he believes are the best long-term investment opportunities, which ones he is cautious on, and what the future holds for the sector as a whole. Do you think it’s worth investors owning Healthcare stocks, given the current environment? When looking at stocks to buy within any sector, there are two key factors to consider: Are there good quality companies within the sector? If so, are they good value? The answer to the first question is easy – yes, as there are many high quality healthcare companies listed in Australia that are actually global leaders in their field. These companies possess the criteria that IML always looks for in a stock i.e. a strong competitive advantage, recurring earnings and capable management. These include CSL, Cochlear, Sonic Healthcare, Ramsay Healthcare and Ansell, to name a few. The harder question to answer today is whether these companies represent good value, following  the re-rating that many of these stocks have enjoyed in the last few years. Looking at the sector, many healthcare companies are currently trading at high price earnings(PE) ratios. However, a high multiple doesn’t necessarily mean a stock is overly priced, and so this is where, as an analyst, it is critical that I make an assessment of each company’s quality and long term prospects. As an example, CSL is a global leader that invests over a third of its earnings back into R&D, so that it can continue to grow sustainably. This has allowed CSL to deliver earnings growth of 20 per cent per annum for over 20years. This means that it clearly deserves a premium to the Industrials market – the question is, how much of a premium? Looking at the whole sector, the PE premium is now close to 100 per cent relative to the broader market, which is close to historical highs. And there are a number of companies with PE multiples at, or near, their own 10-15 year highs. These include Cochlear (40x), Fisher & Paykel Healthcare (37x) and ResMed(28x). The premiums for these larger stocks makes us less optimistic about the sector’s returns in the near term but, as always, there are stocks that are offer value – it’s just that they are now much harder to find. Embed from Getty Imageswindow.gie=window.gie||function(c){(gie.q=gie.q||[]).push(c)};gie(function(){gie.widgets.load({id:’_50hZf75Qapwb7TjJCgMZg’,sig:’XYa8ds58qkfxWdvrt9OOQzNrGLr5mDIzszf3sgctyMI=’,w:’594px’,h:’369px’,items:’101909719′,caption: true ,tld:’com.au’,is360: false })}); What is your favourite Healthcare stock and why? This would have to be CSL, which was originally a government entity (Commonwealth Serum Laboratory) that was listed in 1994, with a market cap of less than $500m. Today CSL is the global leader in the plasma industry, having delivered compound earnings-per-share growth of 20 per cent per annum for over 20 years and now has  a market cap  of over $60bn. CSL’s excellent management team has been a big driver of this success, with its strong science focus ensuring R&D is an ongoing strategic priority. CSL has also benefited from a number of well-timed large acquisitions, which have continued to improve its business. CSL has been very patient but also bold, with these acquisitions being made at ideal points in the cycle. In my view, CSL ranks with Westfield, Brambles and Amcor as one of Australia’s best international success stories. The question now is, with the Healthcare sector’s ongoing focus on innovation, can CSL continue to stay ahead of its competitors and continue to perform well? As a global leader, CSL’s scale means it has  relatively low-cost operation and the ability to run large R & D programmes relative to all of its competitors. We first invested in CSL in 2010 at $30, and with it now trading at well over $140, we have recently trimmed our holding. While CSL is IML’s largest healthcare stock holding and has been for some time, Sonic Healthcare is currently my favourite investment. Sonic Healthcare is the largest pathology operator in Australia, Germany, Switzerland and the UK. It has a great reputation for quality and service, while its long-standing management team has a strong focus on innovation and developing new…

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