SHARES

The quality healthcare company with customers for life

By

There's an old saying in finance when it comes to valuing stocks. Paraphrased: in good times, everyone focuses on earnings; in bad times, it's the balance sheet that counts.

It might be fair to update it slightly, in these days of companies without huge fixed-asset bases like factories and machinery. And I'd replace balance sheet with quality.

When the herd is running, it's tempting to ignore the quality underpinnings of a company, and just go for growth; to chase whatever's hot; to keep up with the go-go Joneses.

healthcare cochlear stock

Of course, an economic shock like, say, a pandemic, can really muck up those plans. As Warren Buffett says, it's when the tide goes out that you find out who's been swimming naked.

Which is why, midway through our 2020 Best in Breed series*, it's worth remembering just why we're doing this. We're not looking for speculative hot stocks. And we're not discounting that the lower-quality businesses of today could be the Best in Breed winners of tomorrow. No, we're doing it because quality counts.

Quality will win out, over time. And we're not talking longevity, popularity or ubiquity here - there are plenty of companies that would meet those standards but which, in my view at least, are poor-quality businesses.

Quality means, among other things, a competitive advantage. It often means pricing power, balance sheet strength, a customer base that isn't going anywhere any time soon, or a brand that is highly valued by its customers. Ideally, it means many or all of those things - and others, besides.

Let's turn our gaze, then, to the healthcare sector in particular. As we did last year, we're excluding companies that like to think of themselves as healthcare companies but really aren't. Prime among that group are aged care businesses that, by dint of their business models, are closer to property trusts than anything. And we'll put health insurers to one side (they're financial businesses that happen to insure health outcomes). Ditto health software which is, as the name suggests, software.

Even that leaves us a wide field. We have medical device makers, hospitals, diagnostic clinics and pharmaceutical manufacturers. (Everything is "biotechnology" these days, and while sometimes literally true and applicable it is increasingly used as a marketing label to attract investors).

This is one sector in which Australia boasts plenty of, if not world beaters, at the very least globally competitive players.

Some of the newer cabs off the rank include Nanosonics, whose ultrasound probe disinfectant technology is fast becoming the standard of care around the world. Both ResMed and Fisher & Paykel Healthcare (technically a New Zealand company, but we have a history of claiming the best Kiwis for ourselves) are dominant players in airway management. And not forgetting the biggest of them all (with a not-too-unlikely chance of becoming the largest company on the ASX in due course), CSL, which continues to take its plasma-and-vaccines business to ever greater success.

Foolish takeaway

The winner (despite having run its balance sheet too lean, and needing to raise capital a short time back - hopefully a lesson it learns and something it doesn't repeat) is an Australian business with a dominant brand, high levels of practitioner support and recommendation, industry-leading technology and a long history of successful innovation.

It has a large and growing market, particularly as the developed world becomes more affluent, and its clients are almost all, by definition, customers for life. The long-term future is bright, and the Best in Breed healthcare company is last year's carry-over champion, hearing implant maker Cochlear (ASX: COH).

* The Best in Breed series features monthly in the print issue of Money magazine.  This article was first published in Money's June issue.

RELATED STORIES

Scott Phillips is general manager of The Motley Fool. You can reach him at @TMFScottP on Twitter and via email.
Post a comment
Link to something IdnZHkv5