If you're not a fan of investing in our banks – or even if you are, but your portfolio already has more than enough of them – where do you put your money? You're likely looking for something safe, reliable, and, well, ''defensive", as they say in the trade.
And if you're like most people, your gaze will pretty quickly fall on the healthcare sector. We're all getting older, we all get sick, and the continuous improvements in technology mean medicos are finding more – and more expensive – ways to patch us up and keep us going. And, given our system of public and private healthcare here in Australia, the sector is about as immune from economic cycles as it gets (short of funeral homes and tax collection).
![Dr Colin Goldschmidt, the chief executive of Sonic Healthcare, which bumped its top line by 20 per cent and its bottom ...](/web/20160825171918im_/http://www.brisbanetimes.com.au/content/dam/images/g/q/w/l/5/c/image.related.articleLeadwide.620x349.gqwl6d.png/1471929801561.jpg)
The broad recognition of those factors, though, means that shares in the healthcare sector are rarely cheap and quite often pretty expensive. Which is OK if you're after sub-par returns, but if not, you need to separate the expensive-for-a-reason wheat from the just-plain-pricey chaff.
Which brings us to reporting season. And it's been something of a mixed bag.
Clean bill of health
There have been a couple of standout stars in the healthcare arena so far this earnings season. Perhaps the most impressive was hearing implant maker Cochlear. Success here in Australia, but more importantly, overseas, has seen a 12 per cent increase in sales of the company's cochlear implant devices. A nice currency boost saw that number almost double when it came to the business' bottom line, pleasing shareholders, and sending shares up 7.6 per cent when the results came in.
Also pleasing shareholders was Sonic Healthcare. The pathology and diagnostic imaging business bumped its top line by 20 per cent and its bottom line profit by a very healthy 30 per cent for the year. It, too, benefited from favourable currency movements, with both numbers 6 per cent higher thanks to a weaker Aussie dollar. Acquisitions continue to drive the company, and more are likely to come, despite (or perhaps because of) an uncertain government funding environment here in Australia. Most of that gain was "priced in", though, with shares up only slightly on the day.
Sick parade
Less well treated by earnings season was healthcare-cum-pharma stalwart, CSL. The company that started life as government agency Commonwealth Serum Laboratories – and has been one of the best long-term performers on the ASX – couldn't keep up the pace in its 100th year of operation, as profits fell 10 per cent. It spun the results, saying that the underlying profit was actually up 5 per cent, once a loss-making division and some one-offs were removed. The market didn't buy it, and shares fell 5 per cent on the news. CSL is forecasting a return to growth in the coming year.
Foolish takeaway
No matter which sector of the economy a company operates in, its shares are priced on expectations of future success. Healthcare companies have earned higher prices in the past because of market expectations of success and stability, but investors are notoriously impatient when their hopes are dashed.
Cochlear, Sonic and CSL are Australian success stories, with meaningful overseas operations. That's not enough for investors – they want to see more success in the future. Of the three, I think Cochlear represents the best value, and while CSL shares remain expensive – even after the fall – the company has an enviable track record that you ignore at your peril. Sonic is in an attractive part of the healthcare business, but the federal government knows it, and has been reviewing funding accordingly. That makes it a little too hot for me to handle.
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Scott Phillips is the Motley Fool's director of research. You can follow Scott on Twitter @TMFScottP or email ScottTheFool@gmail.com. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).