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3 Stocks to Bank on Rebounding Outpatient Home Health Industry

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The COVID-19 pandemic has been a biological crisis of unprecedented nature that has altered the very nature and dynamics of the healthcare industry. The Zacks Medical - Outpatient and Home Healthcare industry bore the brunt of lower outpatient clinic visits and struggled to provide quality care with respect to home healthcare due to the risk of exposure to the virus. However, with the easing of prior restrictions and massive vaccination drive, the recovery has been encouraging. Also, rising dependence on telehealth and artificial intelligence (AI) is likely to help the industry thrive in the near term. DaVita Inc. (DVA - Free Report) , Chemed Corporation (CHE - Free Report) and U.S. Physical Therapy, Inc. (USPH - Free Report) are likely to gain from the prospects.

Industry Description

The industry comprises companies that provide ambulatory care in an outpatient setting or at home. These companies utilize advanced medical technologies for diagnosis, observation, consultation, treatment and rehabilitation services. The industry participants also include kidney dialysis centers, freestanding ambulatory surgical units, emergency centers and other outpatient care centers. Interestingly, Quest Diagnostics (DGX - Free Report) is one of the companies from this space that was at the forefront of the COVID-19 pandemic response in 2020, playing a crucial role in expanding access to laboratory insights to enable people lead healthier and safer lives. The company offered both molecular diagnostic and antibody serology tests, which help in the diagnosis of COVID-19 and the identification of immune response to the virus.

Major Trends Shaping the Future of Outpatient and Home Healthcare Industry

Cost Effectiveness: The primary advantage of the outpatient clinics is cost effectiveness. Outpatient medical care clinics do not retain patients for long hours (overnight) or charge exorbitantly. Notably, modern day outpatient clinics offer a broad spectrum of treatment and diagnostic options, and even minor surgical procedures. Financial incentives like health plans and government program payment policies supporting services in lower-cost care settings have also been driving outpatient care. In fact, this is the primary reason why middle-class Americans, making up more than 62% of the total population, prefer outpatient clinic visits.

Participating in Alternative Payment Models: It only seems reasonable for outpatient clinics to shift from fee-for-service (FFS) to alternative payment models (APM) with shared savings, risk, bundled payments or population-based payments. With value-based models of care steadily emerging as the future of healthcare, this shift is an ongoing parallel trend. FFS will be crucial to care organizations as a benchmark by which providers can assess alternative payment models. By obtaining the payment schedule from payers and comparing it to the organization’s FFS reimbursements from the same payer, providers can ascertain APM that would be financially the most advantageous to its operation.

AI’s Dominant Role: AI has been a roaring success in healthcare. It’s no wonder that it has taken the outpatient and home healthcare space by storm. Outpatient companies prefer bots and automated techniques for managing health information. With the help of AI, hospitals have been achieving better outcomes with patients receiving more efficient and personalized care. The outpatient industry has been generating huge profits from Electronic Health Records, Revenue Cycle Management, eLabs and ePrescriptions. Notably, Quest Diagnostics’ Quanum solutions unit is an AI platform that streamlines 20 billion laboratory data test results and other health information for population health management and clinical care.

Increased Dependence on Telehealth: The COVID-19 pandemic resulted in decline in outpatient clinic visits. Meanwhile, home healthcare providers have struggled to offer quality care due to risk of exposure to the virus. However, the impact of the pandemic can be far-reaching as it has accelerated healthcare innovation. Visits to outpatient clinics have been witnessing a rebound with the easing of stay-at-home restrictions but patients are still apprehensive about venturing out and are resorting to telehealth. Meanwhile, home healthcare can gain from the benefits provided by Medicare (and several other payers) that comprises a broad range of services, which can be delivered in a patient’s home, including post-operative and chronic wound care, rehabilitation, physical therapy. These services serve as lifelines for vulnerable patients, which include Medicare population that can suffer from complications arising from COVID-19. Moreover, home healthcare has also seen a surge in utilization of the telehealth platform in response to the pandemic.

Zacks Industry Rank

The Zacks Medical - Outpatient and Home Healthcare industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #131, which places it in the bottom 48% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid 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.

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

Industry's Stock Market Performance

The industry has outperformed its sector in the past year. However, it fell short of the Zacks S&P 500 composite over the same time frame.  

The industry has climbed 12.2% over this period compared with the S&P 500 and the broader sector’s rally of 42.5% and 3.5%, respectively.

One Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E), which is commonly used for valuing medical stocks, the industry is currently trading at 23.09X compared with the S&P 500’s 21.70X and the sector’s 22.74X.

Over the last five years, the industry has traded as high as 24.84X and as low as 14.41X, with the median being at 18.64X, as the charts below show.

Price-to-Earnings Forward Twelve Months (F12M)

Price-to-Earnings Forward Twelve Months (F12M)

3 Promising Outpatient and Home Healthcare Stocks

DaVita Inc.: DaVita is a leading provider of dialysis services in the United States to patients suffering from chronic kidney failure, also known as end stage renal disease (ESRD). It provides outpatient dialysis, hospital inpatient dialysis and ancillary services such as ESRD laboratory and disease management. The company’s strategy of acquiring dialysis centers and businesses that own and operate dialysis centers, and ancillary services continues to drive its top line. As of Mar 31, 2021, the company provided dialysis services to a total of around 238,900 patients at 3,150 outpatient dialysis centers, of which 2,827 centers were located in the United States and 323 across 10 countries outside the United States. The company carries a Zacks Rank of 2 (Buy). You can see  the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

For this Denver, CO-based company, the Zacks Consensus Estimate for 2021 revenues suggests growth of 0.3%. The same for earnings indicates an improvement of 22.6%.

Price and Consensus: DVA


Chemed Corporation: Chemed, purchases, operates and divests subsidiaries engaged in diverse business activities. Despite the COVID-19 challenges, the company’s Roto-Rooter segment delivered strong performance in first-quarter 2021, thereby contributing to top-line growth. The company carries a Zacks Rank of 3 (Hold).

For this Cincinnati, OH-based company, the Zacks Consensus Estimate for 2021 revenues indicates an improvement of 2.6%. The company’s expected long-term earnings growth is currently pegged at 7.4%.

Price and Consensus: CHE


U.S. Physical Therapy, Inc.: U.S. Physical Therapy is the largest publicly-traded, pure-play operator of outpatient physical and occupational therapy clinics. The clinics provide pre- and post-operative care for a variety of orthopedic-related disorders and sports-related injuries, rehabilitation of injured workers and preventative care. Increase in telehealth visits and higher net rate per patient visit have been helping the company navigate through the ongoing pandemic. Moreover, a raised 2021 earnings outlook is a major positive. The company carries a Zacks Rank #3.

For this Houston, TX-based based company, the Zacks Consensus Estimate for 2021 revenues indicates an improvement of 14%. It has a trailing four-quarter earnings surprise of 92.4%, on average.

Price and Consensus: USPH

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