Reporting Season

Is this as good as it gets for Pro Medicus?

Thu 15 Feb 24, 2:23pm (AEST)
ReportingSeason Feb24 ProMedicus Primary (1)
Source: Livewire Markets

Key Points

  • Pro Medicus consistently surpasses expectations, showing impressive growth with earnings nearly quintupling in five years, yet facing a market reaction with shares down over 11%.
  • Despite market reaction, PME reports strong H1 FY24 results with significant revenue and profit growth, securing four new contracts valued at $200 million
  • Analysts remain positive on PME's long-term outlook, viewing it as a technology play with continued potential, though acknowledging risks from competitors in the sector

It is one thing for a company to set the bar extremely high when it comes to products, earnings, and growth. It's another for that company to exceed expectations consistently. But Pro Medicus (ASX: PMEis a company that continues to do just that.

In the five years between 2018 and 2023, Pro Medicus' earnings per share (EPS) nearly quintupled from 12.4 cents per share to 58.1 cents per share. Revenues are up 347% in that same time and the company's net profit margin was, at its last report in August, inches away from the cherished 50% mark. 

During the last half, it achieved record profits and won four new contracts valued at a total of $200 million. 

That said, Mr. Market did not like today's result. Shares in Pro Medicus are down more than 11%, as of writing. Put another way, more than $1 billion has been shaved off the market capitalisation of the company in just the first three hours of trade.

So is this slide a good reason to start trimming profits from a company that is - by all traditional metrics - extraordinarily expensive? 

We'll answer that question and more with the help of Tobias Yao, Portfolio Manager at Wilson Asset Management. And I should note, PME is not a major holding in any of the major WAM LICs.

Pro Medicus H1 FY24 Results

  • Revenue from ordinary activities +30.3% to $74.1 million

  • Underlying profit before tax +31.5% to $48.9 million

  • Net profit +33.3% to $36.3 million

  • Cash and other financial assets +8.3% to $131.5 million

  • Company remains debt-free

  • Fully-franked interim dividend of 18 cents/share

  • 4 new contracts in North America, worth $200 million

1. In one sentence, what was the key takeaway from this result?

It was a very strong result showing consistent growth and a lot more opportunities on the horizon. There weren't any surprises. They have a track record of delivering consistent growth and the result is a testament to that consistency.

2. Would you buy, hold or sell this stock on the back of this result?

Rating: BUY

I would buy on the back of the result given the opportunity to diversify outside of radiology as well as to take advantage of the other artificial intelligence opportunities on the horizon. 

3. What’s your outlook on this stock and the sector over the year ahead?

We continue to remain positive on Pro Medicus over the long term and a select group of healthcare companies in general given their recent underperformance. We view Pro Medicus as more of a technology play, but if I strictly look at the healthcare space, our highest conviction pick is Regis Healthcare (ASX: REG).

Pro Medicus was our top tech holding for us. When interest rates started going up in 2021 and everything started falling, we loaded up on Pro Medicus and that was one of our best performers over the last three years. 

Screenshot 2024-02-15 at 12.47.25 pm
PME 1-yr share price vs the ASX 200 Healthcare Sector. Shares are off 10% in today's trade. (Source: Market Index)

4. Are there any risks to this company and its sector that investors should be aware of?

There are always risks around competitors - particularly in the space they are in. They continue to be a leader but everyone else is trying to grab a piece of the pie. I'm sure that management is not resting on their laurels and they are working hard to stay two to three years ahead of the competition. 

5. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious about the market in general?

Rating: 2

We think there is quite a lot of value in the market but six to 12 months ago, it would have been 1. This specifically refers to small-cap industrial companies which have been a huge laggard and not so much the market. We are very bullish on small-cap industrial companies given the interest rate direction and the narrative has changed since late last year.

This article first appeared on Livewire Markets.

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Written By

Hans Lee

Content Editor

Hans is a Content Editor at Livewire Markets and Market Index. He created Signal or Noise and helps write the LW-MI Morning Wrap on Tuesdays and Thursdays.

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