Back to top

Image: Shutterstock

5 Medical Services Stocks Countering Industry Headwinds

Read MoreHide Full Article

The COVID-19 crisis has significantly transformed the medical services industry. Since the onset of the pandemic, with digital healthcare treatment becoming indispensable, the industry has been witnessing significant demand for telemedicine-focused online medical and AI-powered technology services. Companies in the remote healthcare space have seen their stocks rally amid the economic volatility. HealthEquity, Inc. (HQY - Free Report) , Progyny, Inc. (PGNY - Free Report) , Surgery Partners, Inc. (SGRY - Free Report) , ModivCare Inc. (MODV - Free Report) and Agiliti, Inc. (AGTI - Free Report) are a few such stocks. The resurgence of COVID-19 cases has dealt a blow to the manual workforce and healthcare infrastructure as patients are once again deferring their non-essential procedures and hospital stay. Further, COVID-19 has taken a staggering toll on the National Health Expenditure (NHE) plan, resulting in a massive disruption in terms of health care spending, utilization and employment trends.

Industry Description

The Zacks Medical Services industry comprises third-party service providers and caregivers appointed by core healthcare companies for economies of scale. The industry includes pharmacy benefit managers (PBM), contract research organizations (CRO), wireless MedTech companies, third-party testing labs, surgical facility providers, and healthcare workforce solutions providers among others. Over the past few years, this industry has strategically moved from volume- to value-based care. This changing pattern of care calls for efficient and better facilities, thus increasing the need to appoint specialized external service providers. With growing importance of effective healthcare management, the medical service industry has become an integral part of the modern healthcare system.

5 Trends Shaping the Future of the Medical Services Industry

COVID-Led Procedure Deferral May Continue: The fast-mutating SARS-CoV-2 has raised questions about the sustainability of the ongoing economic rebound. Seeing the recent resurgence of cases nationwide, CDC, in August, noted that several state, local, and territorial governments may once again have to implement travel restrictions in places.  This might once again impact the non-COVID healthcare infrastructure, pulling down their revenues.

Disruption in Healthcare Spending: Going by a Health Affairs report, CMS’ annual update to the National Health Expenditure Accounts (NHEA), released on Dec 16, 2021, clearly showed that NHE increased 4.6% in 2019, showing a relatively stable trend of annual growth since 2016. However, this consistency was upended by the COVID-19 beginning March 2020, resulting in massive short-term health sector spending and employment disruptions.

Digital Revolution Amid the Pandemic: With an increase in the adoption of digital platforms within the medical device space, remote monitoring, robotic surgeries, big-data analytics, bioprinting, 3D printing, electronic health records (EHR), predictive analytics, real-time alerting and revenue cycle management services are gaining prominence in the United States. A June 2020 Digital Health Market report suggests that this market, valued at $106 billion in 2019, will witness 28.5% CAGR through 2026. Various other reports suggest that companies that adopted artificial intelligence technologies witnessed a 50% reduction in treatment costs and also experienced more than 50% improvement in patient outcome. Amid the pandemic, this line of healthcare is becoming a major choice for contactless healthcare services. In 2020, the Centers for Disease Control and Prevention asked healthcare service communities to increase the use of telemedicine.

Nursing Care Market Boom: With rising cognizance about the benefits of specialized medical caregiving, the need for healthcare workforce/staffing service providers has increased significantly. For example, the demand for nurses has increased manifold driven by the rising incidence of chronic disorders in the United States and is expected to be high in the days ahead. Going by a report published by WFMJ, the U.S. nursing care market size is expected to be worth $460 billion in 2020 and witness a CAGR of 6% during 2020-2025.

New Technology Adoption: A significant reduction in regulatory and tax burden on U.S. healthcare companies is creating opportunities for mobile and wireless medical technology companies. This apart, treatments are becoming less invasive with shorter recovery times, thanks to the specialized skills and advanced techniques of surgical facility providers. In the future, concepts like ‘bed less hospitals’ are expected to gain popularity. Currently, third-party laboratory testing providers and contract research organizations are also seeing a surge in demand, owing to the growing need for complex tests, services and clinical research.

Zacks Industry Rank Indicates Weak Prospects

The Zacks Medical Services industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #206, which places it in the bottom 19% 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 dull 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.

We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Underperforms Sector and S&P 500

The Medical Services Industry has underperformed its own sector as well as the S&P 500 over the past year. The stocks in this industry have collectively lost 38.7% during the said time frame against the S&P 500 composite’s rise of 29.8% and the Medical Sector’s 1.2% dip.

One Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing medical stocks, the industry is currently trading at 24.50X compared with the S&P 500’s 21.86X and the sector’s 23.71X.

Price-to-Earnings Forward Twelve Months (F12M)

Over the last five years, the industry has traded as high as 30.39X, as low as 10.08X, and at the median of 14.62X, as the charts below show.

Price-to-Earnings Forward Twelve Months (F12M)

5 Stocks to Buy Right Now

Below are five stocks within the Medical Services industry that have been witnessing positive earnings estimate revisions and carry a Zacks Rank #2 (Buy), at present.

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

HealthEquity: This company provides integrated solutions for health-care account management, health reimbursement arrangement and flexible spending accounts for health plans, insurance companies and third-party administrators in the United States. It recently enhanced its bioproduction offering through several technology launches.

The Zacks Consensus Estimate for fiscal 2022 (ending Jan 2022) revenues indicates a year-over-year rise of 4%. The company delivered an earnings surprise of 24.4%, on average, in the trailing four quarters.

Price and Consensus: HQY


Progyny: The company is a U.S.-based fertility benefits management company,  providing a comprehensive and inclusive fertility solution that can simultaneously benefit employers, patients, and physicians. Progenity recently completed the PRO-104 validation study for its Preecludia RSA. Further, with its advanced dose single-molecule detection platform, the company is committed to making technical-commercial progress.

This Zacks Consensus Estimate for 2021 revenues indicates a year-over-year surge of 49.8% with earnings for this period projected to witness a 161.1% surge.

Price and Consensus: PGNY


Surgery Partners: This is a healthcare services company with a differentiated outpatient delivery model focused on providing high-quality, cost-effective solutions for surgical, and related ancillary care in support of both patients and physicians. Amid the persistent pressure of COVID-19, the demand for the company’s services and the value proposition it offers to payers, physicians, and patients resulted in record-breaking revenues in the last-reported second quarter of 2021.

The Zacks Consensus Estimate for 2021 earnings and revenues indicates year-over-year surge of 100.8% and 19.9%, respectively.

Price and Consensus: SGRY


ModivCare: This  technology-enabled healthcare services company provides a suite of integrated supportive care solutions for public and private payors and their patients. The company’s value-based solutions address the social determinants of health (SDoH), enable greater access to care, reduce costs, and improve outcomes.

The company has a long-term historical earnings growth rate of 30.4%. For 2021, revenue growth expectation is pegged at 42.7%.

Price and Consensus: MODV


Agiliti: This is an essential service provider to the U.S. healthcare industry with solutions that help support a more efficient, safe and sustainable healthcare delivery system. The company currently enjoys the largest medical device fleet in the country, owning more than 0.25 million capital medical devices and related accessories. Despite the pandemic impacts, the company’s Clinical Engineering and Onsite Managed Services both registered a more normalized demand during the second quarter.

The Zacks Consensus Estimate for 2022 earnings and revenues indicates year-over-year growth of 14.3% and 8.8% respectively.

Price and Consensus: AGTI

Published in