There are not many sectors which I would consider to have an almost guaranteed long-term upside, but the one that stands out is healthcare. The world has an ageing population, therefore the potential growth of this sector could be unlimited.
One company that services this market is Craneware (LSE:CRW), a Scottish firm that sells billing software to the US healthcare industry to deliver savings for its clients. Its focus is on the largest and most competitive market in the world, which is a shrewd move as success in America gives it the best chance to carve an impressive international market share for its product. Its software is currently used by around a quarter of US hospitals so it has plenty of room to grow, and as my Foolish colleague Roland Head points out, once the products are used by hospitals it is very difficult to replace them. This helps growth as existing revenues are well protected.
Is the company overpriced?
It fits the profile that I look for in a stock, with very good return on capital employed (ROCE) of 36% and a good operating margin at 28%. These attributes make it a high quality stock and such companies normally trade at a premium. Craneware is no exception as the price-to-earnings ratio (P/E), stands at a hefty 42x. This still seems a bit rich considering a growth rate of around 15%, but is there another reason for the premium? Software companies can scale very quickly and I think a lot of market participants feel there could be a bumper set of half-year results on the way on March 5.
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The trigger for the big re-rating in the share was the earlier full-year results (although it has now been dragged back by market conditions). These were good, but I think the main cause for excitement among investors was the news of a 100% increase in new sales, considering the company has an excellent retention rate, this could make for a very good year. The firm is also releasing a new product, Trisus, which it says has had positive results from early adopters.
Backed by management
I like founder-run companies, especially where they have a lot of skin in the game, and on September 10, following the FY results, the CEO purchased £150k of stock to take his holding to 12.7%. This is a big show of confidence considering that the P/E ratio at the time was around 50, a level at which you may expect an insider to consider taking some profits.
Brexit-proof?
While I personally feel that Brexit problems should be resolved long term, one of the benefits of this business is that most of its revenues come from the US, therefore the company will benefit from any falls in the pound against the dollar. Nevertheless the share price has fallen recently showing how temperamental the stock market can be in uncertain times.
With this in mind I might wait for a bit more certainty in the markets before I think about buying Craneware, but this is an exciting stock that I’d be happy to own.
