Are Pro Medicus shares too expensive or is it still a buy? Here’s what the brokers say

Pro Medicus (ASX: PME) is a world leader in medical imaging technologies and is widely recognised as one of the best growth stories on the ASX by many of the major brokers. This has contributed to PME’s stellar share price performance – with it more than doubling over the last 12 months – making it the biggest stock on the entire ASX to do so. It nearly doubled in the 12 months before that…

It's clear: Investors love Pro Medicus! But that heady share price performance has made it hard for many value investors to stomach, let alone buy. The stock always appears to have an eye-wateringly high price to earnings ratio (P/E Ratio).

This means many investors have been waiting patiently for a pullback in PME’s shares so they can potentially snap up a bargain. One of the few opportunities they’ve had over the last two years occurred in the recent market correction, where PME shares dipped from around $146 to $121.

PME’s share price performance has been breathtaking!

But after Wednesday's release of the company’s FY24 results, the share price has shot back up to a new record just under $150! Is PME destined to be the one that got away for many Aussie investors? Is it too high (and too expensive) to buy?

Perhaps we can answer that question today. What do the big brokers think about PME shares right now? Should you buy, hold, or sell? Let’s find out!

Broker response

Bell Potter

Rating: HOLD | Price target: $131.00⬆️ vs $115.00

Views:

• Broker points out that top line growth dipped modestly below the 30% threshold for the first time in recent history, however, this was more than compensated for by the 180 basis points margin expansion

• Broker likes the “highly scalable” nature of the business, this is unlikely to change in the near future

• Broker notes “PME remains priced to perfection” but still expects 26% growth in earnings

Citi

Rating: SELL | Price target: $100.00⬆️ vs $95.00

Views:

• Broker notes that management believes the current operating margins of around 70% are sustainable and are not expected to vary greatly

• Broker expects significant revenue and EPS growth to the end of the decade with a FY24-FY30 forecast earnings per share compound annual growth rate of around 24%

• But the broker suggests the current valuation implies even higher growth which over time will become more difficult to achieve due to market share/size, and for this reason SELL rating is retained on a valuation basis

E&P

Rating: NEUTRAL⬇️ vs POSITIVE | Price target: $154.34⬆️ vs $152.68

Views:

• Broker cites valuation (given recent price increase) as the reason for the rating downgrade

Goldman Sachs

Rating: BUY | Price target: $149.00⬆️ vs $148.00

Views:

• Broker notes PME’s contract pipeline remains strong, supporting US market share gains from around 7% today to over 13% in FY30 by the broker’s estimates

• One negative the broker points out is despite strong top-line growth, the scope for margin uplift remains narrow in the near-term

• In the broker’s view, PME is well positioned into FY25 given several large and high profile contracts, in addition to the accelerating frequency and size of new contract wins

Jefferies

Rating: HOLD | Price target: $140.00⬆️ vs $120.00

Views:

• Broker notes FY24 earnings were ahead of consensus but prefers to maintain a cautious view given the overall outlook

• Broker notes there are risks stemming from timely and in-budget execution of new contracts, including Radnet's DeepHealth OS, this has the potential to negatively impact PME’s market position

• The broker increases its price target for PME, but maintains its HOLD rating as it awaits further clarity on competitive market dynamics

JP Morgan

Rating: NEUTRAL⬇️ vs OVERWEIGHT | Price target: $130.00⬆️ vs $104.00

Views:

• Broker acknowledges PME performed exceptionally during FY24, but expresses concerns about recent share price gains which has led to a questionable valuation - this drove the rating downgrade to NEUTRAL from OVERWEIGHT

• Clearly though, there’s still plenty of quality here and broker notes PME’s contract pipeline remains strong – but the risk is that sustaining recent growth rates requires securing even larger contracts

Macquarie

Rating: OUTPERFORM | Price target: $152.50⬆️ vs $127.50

Views:

• The broker believes PME delivered strong revenue growth in FY24, and profits were ahead of expectations

• The broker cites the company’s strong contracts pipeline as a reason to expect continued strong earnings growth

• The broker likes PME’s competitive advantage and expects this will help drive continued market share gains, plus new products and new markets add to the company’s potential upside

Morgans

Rating: HOLD | Price target: $139.00⬆️ vs $85.00

Views:

• Broker notes results were a slight beat with margin expansion the main drawcard

• There are several positive signs, including growth in multi-product contracts and increased requests for proposals are positive signs

• Whilst the broker’s price target gets a significant bump, it maintains its hold rating due to concerns over PME’s valuation

Wilsons

Rating: MARKET WEIGHT | Price target: $145⬆️ vs $93.00

Views:

• The broker notes PME’s strong track record of delivering reliable earnings growth and market share gains

• Sales and margin growth in these results were particularly impressive, again highlighting the quality and reliability of earnings

• The broker sees fit to substantially increase their price target, noting that investors are prepared to pay a premium for strong and reliable earnings growth, but the current valuation is tough for the broker to justify – hence the MARKET WEIGHT rating

Broker consensus changes

PME broker consensus changes

To obtain a broker consensus rating, I like to assign a value of +1 to any rating better than HOLD/NEUTRAL/MARKETWEIGHT, 0 for HOLD/NEUTRAL/MARKETWEIGHT, and -1 to any rating worse than HOLD/NEUTRAL/MARKETWEIGHT. I associate an average rating value of greater than 0.5 as a BUY consensus, values between 0.5 and -0.5 a HOLD consensus, and values less than -0.5 as a SELL consensus.

Using this method, and accounting for the two rating downgrades, PME’s average rating value of +0.18 (down from +0.27) earns it a consensus HOLD rating.

The highest broker price target is $154.34, held by E&P, allowing for around +3.6% upside from Thursday’s close of $149.02. The lowest broker price target is $34.50, held by Ord Minnett (last recorded update we have on file is 29 May) – who I propose is so far off the pace both in terms of their peers and current market pricing, we should omit them as an outlier.

Accounting for all of the post-results broker updates, PME’s consensus (average) price target has improved to $136.58 from $116.52 (+17.2%). This implies the brokers believe PME shares are as much 8.3% overvalued based on Thursday’s close of $149.02.