2024 was a year of historic market rallies with the S&P5 500 hitting record closing highs returning 28% and its siblings the Nasdaq and Dow Jones returning 36% and 17% respectively.

After an action packed year, I thought it’d be best to cut through the noise and focus on ASX stocks that did particularly well this year. Last week I explored the 3 biggest losers of the ASX 100 and continuing in that fashion but flipping the narrative, this article explores the 3 champions of the ASX 100 in 2024 and what Morningstar sees for them after their significant triumphs.

Biggest winners of the ASX 100

Pro Medicus Limited PME ★

  • Fair Value Estimate: $43.00
  • Share Price: $247.18 (as at 11/12/24)
  • Moat Rating: Narrow
  • Uncertainty Rating: High
  • Price to Fair Value: 5.75 (Overvalued)

Taking the leaderboard of its ASX 100 peers is Pro Medicus Limited (“Pro Medicus”) up almost 160% since the beginning of 2024.

The healthcare software player has been no stranger to coverage this year after posting stellar full year results with revenue and net profit up 29% and 36% respectively. Unsurprisingly, it has been the best performing ASX company in our coverage universe in the past decade.

The company is involved with the development and supply of healthcare imaging software, Radiological Information System (RIS) software and provides services to operators around Australia, North America and Europe. Its main product Visage 7 (a radio imaging technology) is the primary driver of the group’s revenue.

In November Pro Medicus announced a contract win with Trinty Health (one of the largest healthcare systems in the US) for a minimum committed value of $330 million over the next decade.

In response we raise our fair value by 8% to $43 per share. This has primarily been driven by the significant contract win causing an uplift in forecast annualised contracted revenue. Our midcycle earnings before interest, tax (“EBIT”) margin assumption remains the same at 73% by fiscal 2024.

What makes the technology so great?

We find the company wins a narrow moat due to switching costs for Visage 7, contributing 85% of group revenue in fiscal 2022 and is forecasted to contribute over 90% at midcycle. The moat worthy switching costs take the form of lengthy customer contracts that span five to eight years. In this time, the company is able to entrench itself in all aspects of the hospital system. Hospitals are unlikely to switch to a competing product due to costs, risk, inconvenience, time and money. Notably, a growing portion of studying radiologists are being trained with Pro Medicus’ technology.

The company won 100% of major public tenders that it competed for in fiscal 2021 giving the nod of approval for its intangible assets, the internally developed proprietary technology. Visage 7 boasts the fastest system speed in the industry and has further advantages in stability and reliability. Furthermore, implementation of the tech is considerably faster to competing products. Competitor migration can typically take over a year versus Pro Medicus’ approximate three months.

What we think

Morningstar analyst Shane Ponraj maintains that Pro Medicus is materially overvalued with the good news baked in, with its share price trading almost 6x our $43.00 fair value estimate. Shares currently trade an eyewatering 184x our forecast fiscal 2026 earnings per share.

The balance sheet is in a strong position with $155 million net cash as of June 2024. Despite low capital intensity, we expect the company to stay net cash over the next decade providing flexibility to pursue organic or acquisitive growth opportunities as it expands into other departments outside of radiology. Ponraj assumes the company will comfortably maintain a 50% dividend payout ratio.

We forecast a five-year revenue compound annual growth rate of 17%, largely driven by assumptions for Visage 7 in the US. Pro Medicus finds the most success with Tier 1 hospitals across the US as some smaller hospitals do not require that level of technology. Consequently, we anticipate wider uptake to be slow as the more lucrative academic hospitals market inches closer to saturation. Therefore, we believe it is unlikely that future contract wins will be comparable in size to Trinity Health.

For a deep dive My colleagues Mark and Shani covered the company earlier this year in their Investing Compass podcast which explores the rise of the healthcare giant and how to find companies with similar growth prospects.

Telix Pharmaceuticals Limited TLX ★★

  • Fair Value Estimate: $17.00
  • Share Price: $24.15 (as at 11/12/24)
  • Moat Rating: None
  • Uncertainty Rating: High
  • Price to Fair Value: 1.42 (Overvalued)

Continuing down the healthcare route is Telix Pharmaceuticals Limited (“Telix”) the radiopharmaceuticals player up 140% this year. The company’s main product Illuccix, is a PSMA imaging agent for prostate cancer.

Telix has gained significant market share in the radiopharmaceutical industry and accounts for the majority of our fair value estimate. The product is mainly used for staging suspected metastatic prostate cancer Its adoption is also growing for suspected recurrence monitoring and patient selection for radioligand therapy. Telix is also developing a portfolio of clinical stage products that aim to address unmet medical needs in oncology and rare diseases.

In 2024 Telix acquired RLS, America’s only Joint-Commission accredited radiopharmacy network for a consideration of US$250 million. Whilst this increased our earnings per share forecasts by 3% over the next decade, the positive impact was offset by the price paid making the transaction value neutral overall.

Key technology fails to earn a moat

Moats for pharma players typically stem from patents blocking competitors from offering identical treatments for a defined period. From an intellectual property perspective, Telix does not own the rights to molecules or radioisotopes used in radiopharmaceuticals.

Morningstar analyst Shane Ponraj believes Telix lacks a moat given low switching costs for doctors to adopt competing products and limited intangible assets in the industry. High product concentration may see Telix forced to defend its position as competition ramps up over the next decade.

Telix’s Gallium-68 product isn’t alone in the market with Novartis’ Locametz as a direct competitor. Furthermore, Lantheus and its Pylarify product which uses Flourine-18 was first to market in 2021 for commercial use and remains clear market leader with 60% of market by revenue (double that of Illuccix). The US National Comprehensive Cancer Network guidelines currently recommend imaging with Fluroine-18 or Gallium-68, with no evidence that one is superior to the other.

Whilst there are no switching costs associated with the Illuccix product, it is recommended that a patient uses the same radioisotope for all of their scans to ensure accuracy. Telix has high product concentration risk, however, are attempting to diversity with Zircaix and Pixclara which are agents used in the detection of kidney and brain cancer.

These agents aren’t currently approved by the FDA; however, our valuation assumes they will gain US approval with sales commencing in the next few years.

What we think

Whilst we forecast strong double-digit group earnings growth over the next decade, we think the market is overly optimistic about growth through potential new earnings streams in the pipeline – many of which commercially remain unproven.

The balance sheet remains strong with a net cash position of $119 million at June 2024 with forecast free cash flow averaging 82% of net income over the next decade. In the absence of major acquisitions, we expect the company to remain in a net cash position.

Shares are materially overvalued against our $17 fair value estimate with investors banking on the growth of Illuccix sales, of which we conversely estimate average selling prices to decrease by 15% when innovation incentives expire in June 2025.

Our fair value estimate implies a forward fiscal year price/earnings ratio of 79 and considers a forecast of 21% annual revenue growth with 30% profit growth over the next five years. Furthermore, Ponraj expects a five-year group revenue compounded annual growth rate of 26% forward to fiscal 2028.

In a recent edition of Ask the Analyst, Joseph and Shane explore Telix’s growth prospects further.

Pinnacle Investment Management Group Limited PNI ★

  • Fair Value Estimate: $13.40
  • Share Price: $23.03 (as at 11/12/24)
  • Moat Rating: Narrow
  • Uncertainty Rating: High
  • Price to Fair Value: 1.72 (Overvalued)

The final edition to this list is Pinnacle Investment Management Group Limited (“Pinnacle”) who gained an impressive 128% in 2024. Pinnacle provides seed and working capital, as well as marketing, distribution and business support to a network of boutique managers termed ‘affiliates’. The company also earns a share of profit from its affiliates via holding equity interests in them.

The financial services provider was recently in the news for a $400 institutional placement with an offer price of $20.30 per share, reflecting a 50% premium to our fair value estimate of $13.40. Morningstar recommended investors not pursue the offer as it baked in overly optimistic assumptions for earnings per share and cost of capital.

The equity raise is to acquire stakes in VSS Capital and Pacific Asset Management. Both players appear to have commendable records with VSS reportedly delivering internal rates of return exceeding 20% per annum. We believe the transactions expand Pinnacle’s exposure to private markets while enhancing its distribution footprint and cross-selling opportunities across geographies. We raise our fair value estimate to $13.40 per share to reflect the expected earnings upside from growing the new affiliates.

Industry reputation earns a moat

Pinnacle earns a narrow moat through its intangible assets and switching costs. The investment managers affiliate funds under management (“FUM”) have grown to $128 billion as of September 2024, up almost 40% from $92 billion at June 2023.

The company’s key intangible strength is its position as a ‘go-to’ destination for high-performing boutiques that have optimal capacity to deliver outperformance which is difficult for large asset managers to achieve. Remarkably, Pinnacle has a record of picking the right asset managers with 85% of affiliates outperforming benchmarks over the five years to September 2024. The firm has industry wide recognition for superior execution for managers who seek a growth partner.

Morningstar believes affiliates stand more to lose than gain if they walk away from Pinnacle. Immediate obstacles include the loss of seed capital and extensive distribution capabilities. Furthermore, if affiliates were to leave Pinnacle remains in a position of power as it will continue to hold equity interests in them.

What we think

Pinnacle's current share price reflects a 72% premium to our fair value.

Our $13.40 fair value estimate implies a midcycle price/earnings multiple of 17x with a dividend yield of 5%. As an incubator for growth, we expect Pinnacle to grow its affiliate FUM to $264 billion by fiscal 2029. Project portfolio returns will likely average 8% per year and net inflows will average 5% per year which may be higher than established, mature active managers.

The investment manager is in reasonable financial health at minor gearing with $100 million in debt as of June 2024. This reflects a debt/equity ratio of 0.22 and a net debt/EBITDA of less than 1x.

What we can conclude

Healthcare clearly dominated the top ASX 100 performers this year with Telix and Pro Medicus coming out on top. However, Morningstar analyst Shane Ponraj maintains the market is overly excited, particularly with Pro Medicus. He sees better value in long-standing players including Ramsay Health Care (RHC) and Sonic Healthcare (SHL) as we expect margins to expand in 2025.

On the asset management side, Morningstar analyst Shaun Ler says the overall outlook for fund flows remain positive given low volatility and likely lower interest rates. Pinnacle’s share price appreciation may reflect the market’s expectation on Pinnacle to benefit from this context considering its boutique affiliates are better performing that traditional asset managers and offer more product diversity. However, Ler highlights that share price chasing or reducing discount rates in response imply very low risk which in itself is risky. Pinnacle is a capital market facing company and is still highly exposed to cyclical market movements.

At current prices, the companies mentioned in this article screen as materially overvalued. It is important to consider your overarching goal and strategy before investing in individual shares. You can learn more about that here. 

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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.