Is this a better healthcare buy than AstraZeneca plc after today’s update?

One of the UK’s leading providers of veterinary services CVS Group (LSE: CVS) has released a set of upbeat full-year results that suggest now could be the right time to buy it. But is it a superior buy to healthcare sector peer AstraZeneca (LSE: AZN)?

CVS’s sales increased by 30.4% versus the prior year. They were aided by like-for-like (LFL) sales growth of 4.8% that benefitted from increased investment in the company’s services, staff and customer services. Rising sales boosted adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) by 42.5%, which made 2016 a record year in terms of sales and profitability for CVS.

In 2016 CVS acquired 67 surgeries, three crematoria, the VetShare buying group and the VETisco instrumentation business. Together, those businesses are due to deliver sales in excess of £50m per annum and the acquisitions (plus three further surgery acquisitions post-year-end) mean that CVS now operates 363 surgeries. This provides it with a size and scale advantage over a number of its smaller peers that could help it improve its margins over the medium term.

Since the start of the year, CVS’s share price has risen by 13%. This is ahead of the 11% share price gain made by AstraZeneca in 2016. CVS’s growth potential is high thanks to an aggressive acquisition strategy as well as a growing referrals business. It also enjoys a rising level of customer loyalty thanks in part to its Healthy Pet Club, where membership numbers increased by 18% in the last financial year.

CVS is forecast to increase its bottom line by 15% in the current financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.7, which indicates that its shares offer further upside. That rate of growth is well ahead of AstraZeneca’s expected decline in earnings of 2% this year and 3% next year.

Long-term pick?

AstraZeneca is struggling to overcome the losses of patents on key drugs. It will take time for the company to return to positive bottom line growth, but it’s on track to do so over the medium term. This is due to its major acquisition programme that has already dramatically improved the company’s treatment pipeline and should positively catalyse its future earnings.

Therefore, in the long run AstraZeneca could prove to be a better growth play than CVS. It offers greater scale and financial firepower to develop its growth strategy than is the case for CVS. Furthermore, AstraZeneca has a lower risk profile due to its greater geographic diversity, stronger balance sheet and more diversified income stream. Its price-to-earnings (P/E) ratio of 16.1 is also lower than CVS’s P/E ratio of 25.1, which indicates that it offers a wider margin of safety.

While CVS is a sound buy, AstraZeneca has a superior risk/reward ratio. This makes it the better buy of the two stocks for long-term investors.

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Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.