Pro Medicus Limited (ASX: PME) shares hit another record high this week and are now up from 85 cents in June 2019 to $24.55, which means it’s up 28.5x for anyone lucky enough to have held shares that long.
The rise and rise of the business also shows how it’s often never too late to buy into the best performing shares or companies, although I must admit much of Pro Medicus’s rise over the last year is more about improving sentiment than financial results.
Back in September 2018 when shares sold for around $11 I wrote this article explaining ‘Why I’m banking on Pro Medicus shares’, which included several points as to why the company looked attractive as an investment.
Since then not much has changed, so let’s take a look again at why this business looks good.
Founder led – the business has been led by co-founder Sam Hupert since 1983, with Mr Hupert being CEO of the company on and off ever since. As a small or mid-cap investor it’s important to identify founder-led companies where the interests of management are heavily aligned to the interests of shareholders. Otherwise you run the substantial risk that the company you’re buying shares in, is not being run for shareholders as much as it is on behalf of management.
Market leader – It’s not often you’ll find a small-cap tech business on the ASX that is signing up the US’s leading private healthcare bodies such as Mayo Clinics or Mercy Health as major clients. Generally, if a smaller tech company can sign blue-chip clients it’s a sign that it has an excellent product that may provide some sort of pricing power or competitive advantage over rivals. Pricing power for example is often regarded by leading investors as a key quality to identify in a business.
SaaS model – enterprise software-as-a-service is a white hot sector right now as investors start to appreciate it boasts very high gross profit margins due to its recurring revenues and potentially low ongoing capital investment requirements. For example Pro Medicus’s EBIT margin has risen from around 5% in FY 2014 to nearly 50% in FY 2018. Rising margins, growing revenues, and a strong outlook will normally turbocharge a share price.
Outlook – in the share market the past counts for little, although Pro Medicus’s recent track record of executing to plan and large addressable markets suggests it could have a lot of growth in it yet. After all it has huge and very well funded healthcare markets in the U.S. and Europe to target for more subscriber growth.
Profitable – With a valuation of $2.53 billion based on 103.6 million shares on issue Pro Medicus’s $9.1 million net profit for the six months ending December 31 2019 means it’s not going to smoke out the value investors.
On the contrary it now trades for around 50x annualised revenues or 139x annualised net profit.
However, it’s important to note this is a SaaS business that is already profitable, operating on high gross profit margins, with a lot of forward revenue growth already contractually locked in. As such it’s a reasonable expectation that it’ll deliver strong profit growth in the years ahead too.
For example if it delivers a net profit of $54 million by FY 2021 it would be on less than 50x profits.
However, I can’t pretend the shares don’t look expensive and in for a big fall if the company disappoints or investors generally reconsider how much they’re willing to pay for cloud-based enterprise software businesses such as Pro Medicus, Wisetech Global Ltd (ASX: WTC) or Xero Limited (ASX: XRO).
Once again I’d have to rate Pro Medicus shares a hold for now.
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Tom Richardson owns shares of Pro Medicus Ltd., WiseTech Global, and Xero.
You can find Tom on Twitter @tommyr345
The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Pro Medicus Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of WiseTech Global and Xero. The Motley Fool Australia has recommended Pro Medicus Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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