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4 Hospital Stocks to Gain From Growth in Patient Admissions

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The Zacks Medical-Hospital industry is gradually witnessing a recovery with the revival of patient volumes. Cost-control measures and government grants came to the industry’s rescue to minimize its losses to an extent.
Leading hospital companies like HCA Healthcare Inc. (HCA - Free Report) , Universal Health Services Inc. (UHS - Free Report) , Tenet Healthcare Corporation (THC - Free Report) and Acadia Healthcare Company, Inc. (ACHC - Free Report) and are set to benefit from these tailwinds.

About the Industry

The Zacks Medical-Hospital industry comprises for-profit hospital companies that provide healthcare facilities through different types of hospitals, such as acute care, rehabilitation and psychiatric.

These hospitals are engaged in internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, mental health care, and diagnostic and emergency services among others.
Hospital companies receive payments for patient services from the federal government under the Medicare program, state governments under their respective Medicaid or similar programs, managed care plans (including plans offered through the American Health Benefit Exchanges), private insurers and directly from patients.

3 Hospital Industry Trends to Watch out for

Gradual Revival of Patient Admissions: It is expected that some restoration of demand and deferred volumes will be seen in 2021 as the COVID-19 activity lessens. As more vaccines hit the market, hospital companies are hopeful that patient volumes and earnings results could strengthen throughout the year, though both will be non-linear. Rating agency Moody’s is of the view that patient volumes are expected to be fully recovered by late 2021 or early 2022. The rating agency  also holds a stable outlook for the US for-profit hospital industry, which reflects EBITDA growth in  low-single digits over the next year or so as patient numbers gradually return to the pre-COVID levels.

Government Grants Providing Much-Needed Boost: The bipartisan CARES Act and the Paycheck Protection Program and Health Care Enhancement Act provided $178 billion as relief funds to the hospitals and other healthcare providers who are the front-line coronavirus warriors. The Department of Health and Human Services has been disbursing aid since April 2020 to hospitals and other health care providers in tranches. These funds are aimed at relieving hospitals from the loss incurred due to COVID-19 business disruption. Though it won’t be fair to say that these grants will be able to completely mitigate the financial sufferings caused by the revenue loss to the hospital entities but the extent of pain can certainly be reduced with the help of government aid. We note that the leading hospital company Tenet Healthcare mentioned that it is very appreciative of the government relief, which helped alleviate the losses in its system due to COVID-19, thereby allowing it to remain stable and focused on the patient needs.

Per the rating giant Moody’s, government benefits via the CARES Act will continue to boost earnings as well as drive liquidity.

Cost-Control Measures to Save Margins: Cost-saving measures are one of the ways that the hospital companies resorted to for contributing to the margins since the top lines were already stressed. Companies are experiencing an upward pressure on labor costs due to challenges related to nurse staffing, which were caused mostly by demands related to the surge in COVID-infected cases across most hospitals in the country.

Players in the industry implemented cost-reduction initiatives, suspended share repurchases, stalled dividend programs, reduced planned projects and also lowered planned capital expenditures.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Medical-Hospital industry is housed within the broader Zacks Medical sector. It carries a Zacks Industry Rank #49, which places it in the top 19% of 251 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bullish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 19% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential.

Over the past six months, the Zacks Consensus Estimate for 2021 earnings has been revised 10% upward to $8.76 per share.

Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and its valuation picture.

Industry Lags S&P 500 & but Betters Sector

The Zacks Medical-Hospital industry has underperformed the Zacks S&P 500 composite but surpassed its own sector in the past year

The stocks in this industry have gained 15% compared with the S&P 500’s rise of 18.4%. Meanwhile, the Zacks Medical sector has gained 8% in the same time frame.

One-Year Price Performance

Industry’s Current Valuation

On the basis of the trailing 12-month EV-to-EBITDA ratio, which is commonly used for valuing hospital stocks, the industry trades at 6.26X compared with the S&P 500’s 14.45X and the sector’s 10.3X.

Over the past five years, the industry has traded as high as 8.4X, as low as 5.27X and at a median of 7.58X as the chart below shows.





4 Hospital Stocks to Keep an Eye on

HCA Healthcare Inc.:  This currently Zacks Rank #3 (Hold) stock is a  hospital company providing  services via surgery centers, free standing emergency rooms, urgent care centers and physician clinics.

You can see the complete list of today’s Zacks #1 Rank stocks here.

The company’s multiple buyouts helped it increase its patient volumes, enabled network expansion and added hospitals to its portfolio. It also took cost-curbing measures, which will likely aid margins. Its shares have underperformed its industry in a year's time. Nevertheless, with the rise in usage of telehealth medicine, the company expanded its telemedicine product offerings. Given the current scenario, we expect this business to continue performing well because of high demand.

The Zacks Consensus Estimate for current-year earnings has moved 8.1% north to $13.99 over the past 30 days. Earnings of the company surpassed estimates in two of the last four quarters (missed the mark on the remaining two occasions), the average surprise being 58.5%.

Price & Consensus: HCA

Universal Health Services Inc.: This presently Zacks #3 Ranked player owns and operates (through its subsidiaries) acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers.

 ts segments, namely Acute Care and Behavioral Health have been contributing to the top line for a while now. The average number of licensed beds in the acute care hospitals and behavioral health centers have been growing since 2012. Acquisitions always played an instrumental role in building its growth trajectory by adding facilities, beds and hospitals to its portfolio. We believe that it will continue making acquisitions that will help expanding its domestic and international presence. Its balance sheet strength is impressive.

The company’s bottom line surpassed estimates in three of the last four quarters (missed the mark on one occasion), the average surprise being 119.59%.

Price & Consensus: UHS

Tenet Healthcare Corp.  The company owns and operates general hospitals and related healthcare facilities for urban and rural communities across numerous states.

It has been undertaking strategic divestitures to eliminate its non-core and unprofitable business units in a bid to streamline operations and repay debt. Its inorganic growth on the back of accretive acquisitions and alliances remains commendable. Its cost-management program, primarily encompassing headcount reductions and renegotiation of contracts with suppliers and vendors, is likely to benefit earnings.

The Zacks Consensus Estimate for 2021 earnings has been revised 34% upward to $3.99 over the past seven days. The stock currently sports a Zacks Rank #1 (Strong Buy) and its earnings surpassed estimates in each of the last four quarters, the average being 199.09%.

Price & Consensus: THC

Acadia Healthcare Company, Inc.: The company provides behavioral health care services in the United States and the United Kingdom.

The company’s top line has been rising over the years, driven by both organic and inorganic growth. It is well-poised to fund new bed developments, given its solid capital position. Acquisitions are consistently in key focus, which may add scale to its business. It is pursuing buyouts to expand in the behavioral healthcare industry across the United States. It is constantly generating sufficient cash flow to increase its financial flexibility for fortifying its inorganic profile and chasing growth-driving projects. It is in the process of selling its U.K. operations to rationalize its portfolio.

The stock carries a Zacks Rank of 3 at present. Earnings of the company surpassed estimates in each of the last four quarters, the average being 20.8%.

Price & Consensus: ACHC

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