The market has punished the Australian diagnostics group Sonic Healthcare (ASX: SHL) severely in recent months. The share is trading close to its 52-week low and has lost around 17% of its value since the beginning of the year. The reason is quickly found: the “post-COVID hangover”. After the record profits from PCR tests in the pandemic years, yields are now returning to normal. But while the market stares at falling overall profits, it may be missing the point: Sonic’s core business is stronger than ever and management is investing heavily in the future. This could be a rare entry opportunity for anti-cyclical, long-term investors.
The pain of normalization
You can’t sugarcoat it: The loss of highly profitable COVID-19 sales has left deep marks on the income statement. In the 2023 financial year alone, this revenue fell by 80 % and by a further 87 % in the following year. This led to a painful decline in earnings per share (EPS) of 27% on average per year over the last three years. On the stock market, where often only the rate of change compared to the previous year counts, this was a clear sell signal. The share was penalized for the comparison with an extraordinary but unsustainable special situation.
The core business flourishes in secret
But if you only look at the COVID figures, you are missing the real story. The underlying basic business – i.e. regular laboratory and radiology diagnostics – is showing impressive strength. In the 2025 financial year, sales here grew organically by a solid 5%. More importantly, at AUD 685 million, net profit for the 2023 financial year was still 25% higher than in the pre-crisis year 2019. The company’s foundations are therefore not only intact, they have actually grown.
This growth is being driven by unstoppable megatrends. An ageing global population and the rise in chronic diseases are creating a structural increase in demand for diagnostic tests – a non-cyclical tailwind that investors can rely on.
Setting the strategic course for the future
The management under the leadership of the long-standing and highly respected CEO Dr. Colin Goldschmidt did not waste the abundant cash flows of the pandemic years. The balance sheet was massively deleveraged, which now opens up scope for strategic acquisitions. And this scope is being used: With the acquisition of the LADR Group for around AUD 700 million, Sonic is cementing its market leadership in Germany, Europe’s largest healthcare market. Although LADR’s margins are lower than Sonic’s in the short term, the deal promises a return on capital of over 11% after integration – a strategically smart move.
At the same time, Sonic is making a targeted investment in the future of the industry with the acquisition of PathologyWatch in the USA for around USD 150 million: digital pathology and artificial intelligence. Even if this division is not yet profitable, Sonic is securing a decisive technological lead here, which will lead to efficiency and quality improvements in the coming years.
Assessment and outlook: A question of perspective
At first glance, with a price/earnings ratio (PER) of around 21, the share does not appear to be dirt cheap. However, this key figure is based on the currently still depressed profits. Looking ahead, the P/E ratio is a much more attractive 18.5. For a global market leader with a broad economic moat based on economies of scale and network advantages, this is a fair valuation.
The dividend yield of almost 4.8% is particularly attractive for income investors. The management is pursuing a “progressive dividend policy” and has kept the payout stable even in the current transition phase – a strong signal of confidence.
However, the decisive catalyst for the share price is likely to be the company’s forecast for the 2026 financial year. Management is forecasting earnings per share growth of up to 19%. This growth will be driven by the solid core business and the increasing synergies from recent acquisitions. As soon as the market recognizes that the phase of profit normalization is over and a new growth cycle begins, the share is likely to be revalued. Analysts take a similar view: the consensus recommendation is “buy” with an average target price of AUD 28.10, which implies an upside potential of over 25%.
Conclusion:
Sonic Healthcare is a classic case of the market overvaluing short-term, backward-looking metrics and ignoring long-term, fundamental strength. For patient investors who can look past the COVID hangover, this is an opportunity to acquire a quality company with global market leadership, strong competitive advantages and clear growth drivers at a reasonable price. The current weakness could prove to be one of the best opportunities in recent years to get in on this defensive champion.
