S&P/ASX 200 Index (ASX: XJO) healthcare shares could be a good source to find opportunities that can deliver solid returns. There are a number of strong businesses in the space such as CSL Limited (ASX: CSL), ResMed Inc (ASX: RMD), Cochlear Limited (ASX: COH), Ramsay Healthcare Limited (ASX: RHC) and Pro Medicus Ltd (ASX: PME).
I think ResMed and CSL are two of the strongest within that list, so I'm going to do a little comparison between them in this article.
For readers that haven't heard of these two names, I'll provide a brief summary of what they do.
ResMed provides continuous positive airway pressure (CPAP) machines, equipment and digital health to help treat sleep apnea. The business also offers cloud-connected ventilators as well as out-of-hospital healthcare management software.
CSL is one of the world's largest biotechnology businesses. It's involved in things like blood plasma collection and plasma-derived products, vaccines and iron deficiency treatments.
Recent performance
The ResMed share price growth has been impressive over the past five years, with a rise of around 160%. That's thanks to the growth of its core sleep apnea offering, as well as expansion in the software side of things.
The CSL share price hasn't done quite as well, with a rise of close to 80% in the past five years. It has seen growth in areas like its plasma division, the vaccine division and the recent acquisition of Vifor.
Which valuation looks better?
One of the main ways to compare these two ASX 200 healthcare shares is to see which price/earnings (P/E) ratio is better value.
Using the profit forecast on Commsec, which is as good as any, the ResMed share price is valued at 35 times FY23's estimated earnings.
The CSL share price is valued at 37 times FY23's estimated earnings.
CSL is priced slightly more expensively than ResMed, despite its market capitalisation being substantially higher. Investors may consider a very large business like CSL as having fewer growth prospects because it's already massive, so it could be surprising it's trading on a higher valuation.
But, profit growth expectations can play a part.
CSL's earnings per share (EPS) could grow by 45% to FY25, which would put it at 25 times FY25's estimated earnings.
Meanwhile, ResMed's EPS could rise by 28% to FY25, which would put the business at around 27 times FY25's estimated earnings.
By the time FY25 finishes, CSL could be the better value choice if it's able to deliver on profit growth.
I should mention that CSL is spending huge amounts on research and development. This cuts into the company's profit for that year, but then helps the business unlock new earnings streams from the new products they've made.
In FY22, CSL said that it spent $1.16 billion on research of development, so its profit could be boosted significantly if it were to suddenly stop spending. But it's better that it does keep spending for the long term.
Having looked at the projected direction of earnings, and CSL's ongoing heavy investment in research and development, it would be my ASX 200 healthcare share pick.
What about the dividend?
Neither business has a high dividend yield, and I don't think it's a deciding factor. But, it's worthwhile to look at the yields of these ASX 200 healthcare shares.
Commsec numbers suggest CSL could pay a dividend yield of 1.1% in FY23 and ResMed could pay a dividend yield of 0.8% in FY23. There's not a lot in it, so I'm sticking with my preference for CSL shares.
