Owning quality companies for the long term is core to our investment approach at TWD. The most recent share price movements in Healthscope puts this strategy under the spotlight and reminds all of us that quality companies are still subject to short term volatility.
We initially included Healthscope into our portfolio to gain exposure to the significant tailwinds in which the healthcare sector operates. Some of these tailwinds include the fact that Australians are living longer, retiring wealthier, and healthcare professionals are able to do more for their patients due to research and technological advances. All of these factors remain unchanged and Healthscope is generating more profit than they did a year ago.
So why has the share price gone down? The current investment market is priced for perfection, and has all the good news already factored in leaving little margin for error so when Healthscope released the market update below, there was a swift reaction to what many saw as a big disappointment.
“The Company has experienced slower than expected revenue growth in Hospitals in the first quarter. Despite this recent softening in hospital activity during the period, Healthscope remains confident that the industry fundamentals have not changed and the long term demand outlook for the Hospitals division remains strong.”
Looking closer at this announcement we see the worst case scenario being no growth for the next year as some medical procedures may have been deferred in the first quarter of this financial year, but they would need to be attended to in the near future. The long term prospects still remain attractive as the slowdown is around top line revenue growth which will be short term in our view. If the announcement had been a negative impact on profits due to rapid cost increases on their operations or potential issues with their funders being insurers and government, we would be more concerned.
Overall the Australian healthcare sector is still more expensive than their global peers but they are definitely trading at levels where we would be more interested in buying than selling some of these quality shares and we believe Healthscope continues to provide the best opportunities in this space.