Pro Medicus (ASX: PME) is one of the worst performers on the ASX today, with it’s share price down 10%. The only piece of news denting otherwise positive sentiment towards the business is the founders heavily selling down their position in the company, crystallising a combined profit of $72m.
Company directors and founders have an in-depth understanding of the business, having worked in and managed the company for a long time. Since their knowledge will exceed that of the average investor, investors who are positive about the company but see director selling wonder why executives are selling down and what they missed. This puts negative pressure on the share price of the business, causing a selloff.
Pro Medicus share price performance this year (Credit: ASX)
The company declared a net profit of $19.1m, which is up 91.9% on the previous year. This puts the company on a PE ratio of 195, which is indicative of both market expectations for future growth and the company’s earnings quality. The company is on a PEG ratio of 2, which is well above the level of 1 that many investors use to demarcate cheap and expensive growth stocks. Pro Medicus generate sky high EBIT margins because of a strong product offering that is very difficult to compete with, which has led to some investors justifying the company’s rich valuation. The market also likes their SAAS revenue and awards the company higher multiples as a result.
Pro Medicus has a few business units, with the main ones being radiology information systems (RIS), picture archiving and communication (PACS) and advanced visualisation solutions. Their competitive advantage is in providing integrated solutions in imaging IT, which means that entire processes in hospitals are embedded into the Pro Medicus infrastructure. This creates high switching costs, protecting their market share, the effect of which is magnified by the company’s long contracts which operate over several years. This allows the company to concentrate on developing their product, servicing their existing customers and growing their sales pipeline, whilst largely freeing them from concerns over existing customers not renewing SAAS subscriptions.
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