Growth Pains In Sight For Pro Medicus?

Pro Medicus has delivered exceptional returns since its 2000 listing at $1.15 per share. Today, buying a share will set you back around $150, reflecting a market valuation of $15.6 billion.

In terms of share price, Pro Medicus represents what every investor hopes for. A steady climb from the bottom left to the top right of the chart. But we know share price isn’t the only performance indicator. Sometimes, business performance and valuations can diverge significantly.

Their recent FY24 full-year results were nothing short of impressive. As a leading enterprise medical imaging software provider, Pro Medicus continues to prove its worth. With a market cap of $15.6 billion, it’s noteworthy that the company has managed to grow at a rate of 30% per year.

We’ve seen other giants like Amazon and Apple achieve rapid growth despite their size, now standing at $3.5 trillion and $1.8 trillion, respectively.

Pro Medicus assures investors that its strong performance is far from over, especially with new revenue streams from cardiology and artificial intelligence on the horizon. However, they caution that maintaining 30% annual profit growth may not be sustainable indefinitely.

Given that Amazon and Apple have achieved such feats, it’s not far-fetched to imagine Pro Medicus following in their footsteps.

Pro Medicus Financial Year 24 Highlights

Pro Medicus has had another stellar year, securing new contracts with major hospitals and achieving record-breaking results. In FY 2024, the company signed nine contracts in North America and completed nine cloud-based implementations. Laying a strong foundation for growth in FY 2025 and beyond.

Pro Medicus showed impressive growth across all key metrics:

• Revenue surged to $161.5 million, a 29.3% increase.
• Profit after tax climbed to $82.8 million, up 36.5%.
• Underlying EBIT reached $112.3 million, marking a 33.8% rise.
• The final fully franked dividend increased by 33.3%.
• EBIT margins remained robust at 69.5%.
• Cash and investments grew to $155.4 million, up 27.9%.

With North America as Pro Medicus’ largest revenue base, there’s still significant room for growth. Holding only a 10% market share, the company’s growth trajectory appears promising.

Notably, 11 of the top 20 U.S. hospitals use Pro Medicus’ Visage 7 for Picture Archiving and Communication Systems (PACS). This isca testament to the industry’s confidence in their software.

Strong margins at Pro Medicus highlight their ability to command premium prices, reflecting the superiority of their technology. While competitors still offer a mix of on-premise and cloud solutions, Pro Medicus is fully cloud-based.

This gives them a competitive edge with faster implementation and quicker image load times in 2D, 3D, and 4D.

As competitors scramble to catch up what Pro Medicus can offer they remain several steps ahead, solidifying its position as a leader in the industry.

Digging Deeper Into The Business

This Melbourne-based company, stands out in the tech sector for its ability to consistently deliver strong revenues, impressive margins, and steady dividend growth. All without taking on any debt.

This self-sustaining growth model is a rarity, as the company relies solely on its own resources, avoiding shareholder dilution or external financing.

What makes Pro Medicus truly exceptional is its founder-led approach. Founder-led companies often outperform because the founders are deeply invested in the success of their business, both financially and personally.

With Sam Hupert and co-founder Anthony Hall holding a combined 48% stake, their interests are closely aligned with those of investors. They’ve also made it clear that they have no intention of selling their shares, further solidifying their commitment.

Including other insiders, total ownership in the company rises to 51.1%. Institutions hold about 12.3%, private companies own 0.56%, and the general public accounts for 35.7%.

However, the top 20 shareholders control a substantial 89.74% of ordinary shares, meaning there are limited shares available for retail investors.

While Pro Medicus may not be the cheapest stock on the market, its scarcity and strong performance drive demand, creating a seller’s market where prices are dictated by those holding the shares. This dynamic, combined with the company’s stellar growth, fuels optimism among investors.

However, it’s important to remember that optimism can sometimes lead to over-exuberance. Whether Pro Medicus’ current valuation is justified will only become clear over time.

Pro Medicus Valuation

When it comes to investing, the price you pay is crucial because it determines the value you receive. It’s important to remember that a stock’s price can deviate from its underlying fundamentals for longer than you might expect.

A rising stock price doesn’t automatically signify a great business, just as a falling price doesn’t necessarily mean the business is struggling. As investors, our role is to determine the right price to pay for the actual value of a business.

Overpaying for even the best company can turn a promising investment into a mediocre one. No business is worth an infinite price—eventually, the stock price will reflect the company’s true fundamentals.

In a previous FY 2023 valuation, I projected a 35% revenue growth rate for Pro Medicus over the next decade, based on the following assumptions:

• EBIT margin: 68%
• Tax rate: 30%
• Net profit margin: 49%
• Discount rate: 12.5%

This led me to a discounted cash flow valuation of $115 per share, assuming they could sustain its current growth and margins. Considering that in FY 2024, Pro Medicus achieved a 29.5% revenue surge with incremental improvements in net profit and EBIT margins, my analysis appears to be on track.

However, with management suggesting that sustained 30% profit growth might be challenging, it seems that investors are pricing the business with even higher expectations.

If you adjust the discount rate lower or raise growth projections, the $115 valuation may indeed appear conservative. But that’s the inherent flaw in any valuation—it’s a forecast of an uncertain future. The market sentiment around Pro Medicus is overwhelmingly optimistic, with the company priced for perfection.

While I admire Pro Medicus, I find it difficult to justify buying at this current price level.

Key Takeaways

• Pro Medicus continues their growth trajectory achieving record-breaking growth in FY 2024. Securing major contracts, expanding in North America, and maintaining strong margins, they are reinforcing their leadership in cloud-based medical imaging technology.
• Pro Medicus excels in the tech sector with debt-free, self-sustaining growth, driven by strong founder commitment and limited share availability, making it a highly sought-after but potentially overvalued investment.
• The price you pay in investing is key; overpaying, even for a great company like Pro Medicus, can turn a promising investment into a mediocre one.

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