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4 Stocks to Watch From the Flourishing Hospital Industry
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The rapid recovery of patient volumes from the COVID-induced downturn, thanks to the resumption of non-urgent care procedures, is bolstering the Zacks Medical-Hospital industry. Rigorous cost-control measures levied by the firms accompanied by government grants are boosting the bottom lines of the companies in the hospital space. Improvement in technology and utilization of virtual health services are helping hospital companies optimize utility while lowering treatment costs. Leading industry players like HCA Healthcare Inc. (HCA - Free Report) , Universal Health Services Inc. (UHS - Free Report) , Tenet Healthcare Corporation (THC - Free Report) and Mednax, Inc. (MD - Free Report) are set to benefit from these developments.
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 hospital entities are engaged in internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, mental health care, and diagnostic and emergency services, among others. Revenues of these companies depend on inpatient occupancy levels, the medical and ancillary services ordered by physicians and provided to patients and the volume of outpatient procedures. These hospital companies receive payments for patient services from the government under the Medicare program, Medicaid or similar programs, managed care plans (including plans offered through the American Health Benefit Exchanges), private insurers and directly from patients.
4 Trends Defining the Hospital Industry's Future
Recovering Volumes: With the declining intensity of COVID-related headwinds, hospital companies are witnessing higher patient volumes and demand for elective procedures. The surge in admissions, outpatient surgeries and other procedures will boost these companies' results. The rising patient volumes are supported by the success of vaccination among the majority of the population. Higher patient days, emergency department volumes and deferred procedures will keep boosting the hospital companies’ revenues in the future.
Aging Population Growth: Demand for hospital services will continue to rise as the percentage of senior people in the total U.S. population is expected to increase. Per the U.S. Census Bureau’s revised report, census between 2020 and 2030, individuals aged above 65 years are projected to be one of the fastest-growing segments of the U.S. population that climbed from 17% to 21%. Due to the continuous advancements in science, nutrition and healthcare, the senior population is likely to witness constant growth as they are expected to live longer. This demographic change and the rising incidence of diseases will be an industry growth driver.
Cost-Curbing Measures to Boost Profits: During the COVID-induced volatile period, revenue growth was under tremendous pressure and hospital companies had to deepen the focus on cost management to drive margins. Most companies took multiple measures, including improving technologies, to cut costs and boost efficiency. With the current improving medical environment, these companies’ bottom lines are expected to jump, thanks to operating efficiency and favorable measures.
Telehealth & Technology: The pandemic fueled the adoption of telehealth facilities in 2020 and 2021. The year 2022 is expected to see further improvement of technologies and innovations, which will support the adoption of telehealth services. The industry players are leveraging AI and automation along with real-time analytics to provide quality care. AI helps improve clinical workflow management and medical diagnosis that are aiding hospital companies. The companies are utilizing the virtual health domain to heighten their efficiency by limiting the patients’ waiting time and trimming their treatment costs. This should optimize hospital services, minimize unnecessary costs and enhance patient experience.
Zacks Industry Rank Instills Optimism
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates bright near-term prospects. The Zacks Medical-Hospital industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #58, which places it at the top 23% of nearly 250 Zacks industries. 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 50% 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 upbeat about this group’s earnings growth potential. The industry’s earnings estimates for 2022 have increased 22.8% in the past year. Given the sunny near-term prospects, companies in the space are expected to gain heavily.
Before we present a few stocks that you may want to buy or retain in your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms S&P 500 & Sector
The Zacks Medical-Hospital industry has outperformed the Zacks S&P 500 composite as well as its sector in the past year.
In the past year, the stocks in this industry have gained 28.7% compared with the S&P 500’s rise of 13.4%. The Zacks Medical sector has declined 14.8% in the same time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month EV/EBITDA (Enterprise Value/ Earnings Before Interest Tax Depreciation and Amortization) ratio, which is commonly used for valuing hospital stocks, the industry trades at 8.43X compared with the S&P 500’s 14.15X and the sector’s 9.07X.
Over the past five years, the industry has traded as high as 8.58X, as low as 5.31X and at a median of 7.65X as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
4 Stocks to Watch Out For
HCA Healthcare: The company provides services via surgery centers, free-standing emergency rooms, urgent care centers and physician clinics. HCA Healthcare has been emphasizing on acquisitions for expedited growth. Its inorganic growth strategies have led to increased patient volumes, network expansion across several markets and more hospitals in its portfolio. The Zacks Rank #3 (Hold) company’s board of directors authorized a new $8-billion share buyback plan and even hiked its quarterly dividend by 16.7% to 56 cents per share.
HCA Healthcare expects current-year revenues in the band of $60-$62 billion, the midpoint being 3.8% higher than the 2021 figure. Net income is expected between $5.55 billion and $5.835 billion. HCA beat earnings estimates thrice in the past four quarters and missed once, the average surprise being 17.5%. Shares of the company have jumped 40.2% in the past year.
Price & Consensus: HCA
Universal Health Services: It focuses on behavioral indications like eating disorders, sexual trauma, autism as well as disorderliness in the military through its patriot support program. Universal Health opened two new De Novo joint venture hospitals in 2021 in Clive, IA, and Cape Gerardo, MO, to enhance business. This segment holds immense scope for growth in the days ahead, considering the dire need to address behavioral health issues triggered by the pandemic. Its board of directors has decided to increase its share buyback plan by $1.4 billion.
Universal Health expects net revenues for 2022 within $13,424-$13,694 million, indicating an increase from $12,642.1 million a year ago. The Zacks Rank #3 player’s adjusted earnings per share projection of $11.90-$12.90 indicates an increase from $11.82 in 2021. UHS beat earnings estimates thrice in the past four quarters and missed once, the average surprise being 12.5%. Shares of the company have risen 11% in the past year.
Price & Consensus: UHS
Tenet Healthcare Corporation: The company with its subsidiaries provides healthcare services primarily through general hospitals and related healthcare facilities. Tenet Healthcare has made numerous acquisitions, partnerships and strategic alliances aimed primarily at boosting the scale of business, operating capacity and geographical presence. The Zacks Rank #3 company’s performance has been steadily gaining from USPI Holding Company’s operations.
For the current year, THC’s net operating revenues are anticipated within $19.5-$19.9 billion, the midpoint indicating an upside of 1.1% from the 2021 reported figure. Adjusted EBITDA is estimated at $3.375-$3.575 billion, suggesting 6% core growth from 2021’s reported figure. Tenet Healthcare beat earnings estimates in the past four quarters, the average surprise being 66%. Shares of the company have rallied 64.2% in the past year.
Price & Consensus: THC
Mednax: Operational excellence, inorganic growth via strategic acquisitions and strong segmental performance are buoying Mednax’s performance. It is expanding telehealth services to ensure access to healthcare even when staying at home. Given the current situation and easy access, we expect this business line to generate high profits. It recently announced that the company’s affiliated practices are adopting the Pediatrix Medical Group brand. The move is in line with its strategy to improve brand awareness.
While it expects revenues for 2022 to grow marginally from the 2021 level, its adjusted EBITDA for 2022 is likely to be at least $270 million, indicating an increase from the 2021 level of $265.5 million. Mednax beat earnings estimates in the past four quarters, the average surprise being 28%. Though shares of MD have declined 16.9% in the past year, its growing operating strength and disposal of low-profit businesses will improve its efficiency that will drive share value. The company currently sports a Zacks Rank #1 (Strong Buy).
Image: Bigstock
4 Stocks to Watch From the Flourishing Hospital Industry
The rapid recovery of patient volumes from the COVID-induced downturn, thanks to the resumption of non-urgent care procedures, is bolstering the Zacks Medical-Hospital industry. Rigorous cost-control measures levied by the firms accompanied by government grants are boosting the bottom lines of the companies in the hospital space.
Improvement in technology and utilization of virtual health services are helping hospital companies optimize utility while lowering treatment costs. Leading industry players like HCA Healthcare Inc. (HCA - Free Report) , Universal Health Services Inc. (UHS - Free Report) , Tenet Healthcare Corporation (THC - Free Report) and Mednax, Inc. (MD - Free Report) are set to benefit from these developments.
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 hospital entities are engaged in internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, mental health care, and diagnostic and emergency services, among others. Revenues of these companies depend on inpatient occupancy levels, the medical and ancillary services ordered by physicians and provided to patients and the volume of outpatient procedures. These hospital companies receive payments for patient services from the government under the Medicare program, Medicaid or similar programs, managed care plans (including plans offered through the American Health Benefit Exchanges), private insurers and directly from patients.
4 Trends Defining the Hospital Industry's Future
Recovering Volumes: With the declining intensity of COVID-related headwinds, hospital companies are witnessing higher patient volumes and demand for elective procedures. The surge in admissions, outpatient surgeries and other procedures will boost these companies' results. The rising patient volumes are supported by the success of vaccination among the majority of the population. Higher patient days, emergency department volumes and deferred procedures will keep boosting the hospital companies’ revenues in the future.
Aging Population Growth: Demand for hospital services will continue to rise as the percentage of senior people in the total U.S. population is expected to increase. Per the U.S. Census Bureau’s revised report, census between 2020 and 2030, individuals aged above 65 years are projected to be one of the fastest-growing segments of the U.S. population that climbed from 17% to 21%. Due to the continuous advancements in science, nutrition and healthcare, the senior population is likely to witness constant growth as they are expected to live longer. This demographic change and the rising incidence of diseases will be an industry growth driver.
Cost-Curbing Measures to Boost Profits: During the COVID-induced volatile period, revenue growth was under tremendous pressure and hospital companies had to deepen the focus on cost management to drive margins. Most companies took multiple measures, including improving technologies, to cut costs and boost efficiency. With the current improving medical environment, these companies’ bottom lines are expected to jump, thanks to operating efficiency and favorable measures.
Telehealth & Technology: The pandemic fueled the adoption of telehealth facilities in 2020 and 2021. The year 2022 is expected to see further improvement of technologies and innovations, which will support the adoption of telehealth services. The industry players are leveraging AI and automation along with real-time analytics to provide quality care. AI helps improve clinical workflow management and medical diagnosis that are aiding hospital companies. The companies are utilizing the virtual health domain to heighten their efficiency by limiting the patients’ waiting time and trimming their treatment costs. This should optimize hospital services, minimize unnecessary costs and enhance patient experience.
Zacks Industry Rank Instills Optimism
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates bright near-term prospects. The Zacks Medical-Hospital industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #58, which places it at the top 23% of nearly 250 Zacks industries. 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 50% 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 upbeat about this group’s earnings growth potential. The industry’s earnings estimates for 2022 have increased 22.8% in the past year. Given the sunny near-term prospects, companies in the space are expected to gain heavily.
Before we present a few stocks that you may want to buy or retain in your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms S&P 500 & Sector
The Zacks Medical-Hospital industry has outperformed the Zacks S&P 500 composite as well as its sector in the past year.
In the past year, the stocks in this industry have gained 28.7% compared with the S&P 500’s rise of 13.4%. The Zacks Medical sector has declined 14.8% in the same time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month EV/EBITDA (Enterprise Value/ Earnings Before Interest Tax Depreciation and Amortization) ratio, which is commonly used for valuing hospital stocks, the industry trades at 8.43X compared with the S&P 500’s 14.15X and the sector’s 9.07X.
Over the past five years, the industry has traded as high as 8.58X, as low as 5.31X and at a median of 7.65X as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
4 Stocks to Watch Out For
HCA Healthcare: The company provides services via surgery centers, free-standing emergency rooms, urgent care centers and physician clinics. HCA Healthcare has been emphasizing on acquisitions for expedited growth. Its inorganic growth strategies have led to increased patient volumes, network expansion across several markets and more hospitals in its portfolio. The Zacks Rank #3 (Hold) company’s board of directors authorized a new $8-billion share buyback plan and even hiked its quarterly dividend by 16.7% to 56 cents per share.
HCA Healthcare expects current-year revenues in the band of $60-$62 billion, the midpoint being 3.8% higher than the 2021 figure. Net income is expected between $5.55 billion and $5.835 billion. HCA beat earnings estimates thrice in the past four quarters and missed once, the average surprise being 17.5%. Shares of the company have jumped 40.2% in the past year.
Price & Consensus: HCA
Universal Health Services: It focuses on behavioral indications like eating disorders, sexual trauma, autism as well as disorderliness in the military through its patriot support program. Universal Health opened two new De Novo joint venture hospitals in 2021 in Clive, IA, and Cape Gerardo, MO, to enhance business. This segment holds immense scope for growth in the days ahead, considering the dire need to address behavioral health issues triggered by the pandemic. Its board of directors has decided to increase its share buyback plan by $1.4 billion.
Universal Health expects net revenues for 2022 within $13,424-$13,694 million, indicating an increase from $12,642.1 million a year ago. The Zacks Rank #3 player’s adjusted earnings per share projection of $11.90-$12.90 indicates an increase from $11.82 in 2021. UHS beat earnings estimates thrice in the past four quarters and missed once, the average surprise being 12.5%. Shares of the company have risen 11% in the past year.
Price & Consensus: UHS
Tenet Healthcare Corporation: The company with its subsidiaries provides healthcare services primarily through general hospitals and related healthcare facilities. Tenet Healthcare has made numerous acquisitions, partnerships and strategic alliances aimed primarily at boosting the scale of business, operating capacity and geographical presence. The Zacks Rank #3 company’s performance has been steadily gaining from USPI Holding Company’s operations.
For the current year, THC’s net operating revenues are anticipated within $19.5-$19.9 billion, the midpoint indicating an upside of 1.1% from the 2021 reported figure. Adjusted EBITDA is estimated at $3.375-$3.575 billion, suggesting 6% core growth from 2021’s reported figure. Tenet Healthcare beat earnings estimates in the past four quarters, the average surprise being 66%. Shares of the company have rallied 64.2% in the past year.
Price & Consensus: THC
Mednax: Operational excellence, inorganic growth via strategic acquisitions and strong segmental performance are buoying Mednax’s performance. It is expanding telehealth services to ensure access to healthcare even when staying at home. Given the current situation and easy access, we expect this business line to generate high profits. It recently announced that the company’s affiliated practices are adopting the Pediatrix Medical Group brand. The move is in line with its strategy to improve brand awareness.
While it expects revenues for 2022 to grow marginally from the 2021 level, its adjusted EBITDA for 2022 is likely to be at least $270 million, indicating an increase from the 2021 level of $265.5 million. Mednax beat earnings estimates in the past four quarters, the average surprise being 28%. Though shares of MD have declined 16.9% in the past year, its growing operating strength and disposal of low-profit businesses will improve its efficiency that will drive share value. The company currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: MD