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4 Stocks Navigating Through Hospital Industry Headwinds (Revised)
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The hospital space is currently fighting labor shortage, inflation and resultant escalated operating expenses. Even though revenues are increasing, growing salaries and benefits are eating up Zacks Medical-Hospital industry players’ margins. Surplus supply and stiff competition are other major headwinds. However, the resumption of non-essential procedures stimulated a recovery in patient volumes. Rising outpatient surgeries and patient days are boosting hospital players’ operations. Also, technological improvements and adoptions are lowering hospitals' treatment costs. Leading industry players like HCA Healthcare Inc. (HCA - Free Report) , Acadia Healthcare Company, Inc. (ACHC - Free Report) , Universal Health Services Inc. (UHS - Free Report) and Tenet Healthcare Corporation (THC - 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 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, telehealth services, mental health care, and diagnostic and emergency services, among others. Revenues of these companies depend on inpatient occupancy levels, 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 Deciding the Industry's Fate
Rising Costs: Hospital companies are facing high salaries, wages and benefits, and increasing operating expenses due to inflation, which are eroding margins. Investments in growth projects will keep expenses elevated, putting pressure on the bottom line. Even though labor shortages are expected to keep creating headaches for the industry players, the situation is expected to improve in the coming days. Also, the renegotiation of contracts with suppliers and vendors will provide an impetus.
Recovering Volumes: Demand for elective procedures will likely drive patient volumes as the intensity of COVID-related headwinds keeps decreasing. Growth in admissions, outpatient surgeries and Medicare reimbursements and deferred procedures can support hospital companies' revenues. Nonetheless, financial constraints are forcing patients to delay addressing non-emergency medical needs, as found in a survey by Discover Personal Loans, which can be a major headwind. Discover Personal Loans stated that 31% of Americans with medical debt are holding back doctor-recommended treatments.
Growth in the Elderly Population: Steady advancements in science, nutrition and healthcare are enabling the senior population to witness constant growth. This can result in rising demand for hospital services in the long term. The U.S. Census Bureau’s revised report suggests that individuals aged above 65 years are projected to be one of the fastest-growing segments of the country’s population, reflecting a climb from 17% in 2020 to 21% in 2030. This demographic change and the rising incidence of diseases will likely be industry drivers.
Technological Improvements: Technological innovations, improvements and wider adoption will be a major theme in the hospital space. The trend should optimize hospital services, minimize unnecessary expenses and enhance the patient experience. The COVID-19 pandemic triggered the adoption of telehealth and telemedicine services, which will likely rise in the future. 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 utilized by hospitals. The companies are using the virtual health domain to heighten their efficiency by limiting the patients’ waiting time and trimming their treatment costs.
Zacks Industry Rank Indicates Bearish Outlook
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates dull near-term prospects. The Zacks Medical-Hospital industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #204, which places it in the bottom 18% 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. The industry’s earnings estimates for 2022 have decreased 16.1% in the past year. Given the lackluster near-term prospects, companies in the space are expected to take a hit.
Before we present the stocks that you may want to watch, 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 fared better than the Zacks S&P 500 composite as well as its broader sector over the past year. During this time period, the stocks in this industry have declined 17.7% compared with the S&P 500’s fall of 19.1% and the Zacks Medical sector’s decrease of 22.4%.
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 7.70X compared with the S&P 500’s 11.40X and the sector’s 7.66X.
Over the past five years, the industry has traded as high as 8.75X, as low as 5.57X and at a median of 7.74X as the charts below show.
HCA Healthcare: The company provides services via surgery centers, free-standing emergency rooms, physician clinics and urgent care centers. HCA’s inorganic growth strategies have led to increased patient volumes, network expansion across several markets and more hospitals in its portfolio. The company has been gaining from its telemedicine business line. HCA Healthcare also focuses on boosting shareholders’ value with dividend hikes and buybacks.
HCA expects current-year revenues in the band of $59.5-$61.5 billion, the mid-point of which indicates a rise of 3% from the 2021 figure. Given the current situation, profits are expected to continue increasing on the back of admissions. HCA beat earnings estimates twice in the past four quarters and missed on two occasions, the average surprise being 5%. Shares of the company have jumped 5.2% in the past month.
Price & Consensus: HCA
Acadia Healthcare: ACHC provides behavioral healthcare services in the United States and Puerto Rico. It has been emphasizing on acquisitions for expedited growth. Buyouts added facilities, beds and hospitals to Acadia Healthcare’s network and contributed to its top line. It is also actively pursuing JVs with renowned healthcare systems, which is helping it expand its capabilities through bed additions. The year 2022 is likely to be its strongest year in terms of JVs. Its moves to streamline its portfolio to boost efficiency and profitability are also noteworthy.
Acadia Healthcare expects current-year revenues in the band of $2.56-$2.60 billion, indicating an increase from the 2021 level of $2.3 billion. Adjusted EBITDA is projected to be $583-$613 million, implying an increase from $558.7 million in 2021. Adjusted earnings per share are forecast within $2.93-$3.18, calling for a rise from the 2021 level of $2.56. ACHC beat on earnings twice in the last four quarters, met the mark once and missed estimates on another occasion, the average surprise being 3.5%. Shares of ACHC have increased 0.7% in the past month.
Price & Consensus: ACHC
Universal Health Services: UHS focuses on behavioral indications like autism, eating disorders, sexual trauma and disorderliness in the military through its patriot support program. This segment holds immense scope for growth in the days ahead, considering the dire need to address behavioral health issues triggered by the pandemic. Universal Health’s plans to add new capacities in hospitals in important markets of Texas and California to address strong acute care demand are major positives. Earlier this year, the board of directors decided to increase its share buyback plan by $1.4 billion.
Universal Health expects net revenues for 2022 within $13,235-$13,371 million, indicating an increase from $12,642.1 million a year ago. The company expects adjusted earnings per share for this year in the range of $9.60 to $10.40. UHS beat earnings estimates twice in the past four quarters and missed on the other occasions. Shares of the company have risen 0.4% in the past month.
Price & Consensus: UHS
Tenet Healthcare Corporation: THC, with its subsidiaries, provides healthcare services, primarily through general hospitals and related healthcare facilities. The company has made several buyouts, partnerships and strategic alliances to augment the scale of business, operating capacity and geographical presence. Its performance has been stimulated by USPI Holding Company’s (Ambulatory Care) operations.
For the current year, THC’s net operating revenues are anticipated within $19-$19.4 billion. Adjusted EBITDA is still anticipated within $3,375-$3,575 million, suggesting 6% growth from the last year’s reported figure. Tenet Healthcare beat earnings estimates in each of the past four quarters, the average surprise being 87.4%. Even though shares of the company have declined 2.3% in the past month, its strong fundamentals are likely to help shares bounce back in the days ahead.
Price & Consensus: THC
(We are reissuing this article to correct a mistake. The original article, issued on October 20, 2022, should no longer be relied upon.)
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4 Stocks Navigating Through Hospital Industry Headwinds (Revised)
The hospital space is currently fighting labor shortage, inflation and resultant escalated operating expenses. Even though revenues are increasing, growing salaries and benefits are eating up Zacks Medical-Hospital industry players’ margins. Surplus supply and stiff competition are other major headwinds. However, the resumption of non-essential procedures stimulated a recovery in patient volumes. Rising outpatient surgeries and patient days are boosting hospital players’ operations. Also, technological improvements and adoptions are lowering hospitals' treatment costs. Leading industry players like HCA Healthcare Inc. (HCA - Free Report) , Acadia Healthcare Company, Inc. (ACHC - Free Report) , Universal Health Services Inc. (UHS - Free Report) and Tenet Healthcare Corporation (THC - 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 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, telehealth services, mental health care, and diagnostic and emergency services, among others. Revenues of these companies depend on inpatient occupancy levels, 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 Deciding the Industry's Fate
Rising Costs: Hospital companies are facing high salaries, wages and benefits, and increasing operating expenses due to inflation, which are eroding margins. Investments in growth projects will keep expenses elevated, putting pressure on the bottom line. Even though labor shortages are expected to keep creating headaches for the industry players, the situation is expected to improve in the coming days. Also, the renegotiation of contracts with suppliers and vendors will provide an impetus.
Recovering Volumes: Demand for elective procedures will likely drive patient volumes as the intensity of COVID-related headwinds keeps decreasing. Growth in admissions, outpatient surgeries and Medicare reimbursements and deferred procedures can support hospital companies' revenues. Nonetheless, financial constraints are forcing patients to delay addressing non-emergency medical needs, as found in a survey by Discover Personal Loans, which can be a major headwind. Discover Personal Loans stated that 31% of Americans with medical debt are holding back doctor-recommended treatments.
Growth in the Elderly Population: Steady advancements in science, nutrition and healthcare are enabling the senior population to witness constant growth. This can result in rising demand for hospital services in the long term. The U.S. Census Bureau’s revised report suggests that individuals aged above 65 years are projected to be one of the fastest-growing segments of the country’s population, reflecting a climb from 17% in 2020 to 21% in 2030. This demographic change and the rising incidence of diseases will likely be industry drivers.
Technological Improvements: Technological innovations, improvements and wider adoption will be a major theme in the hospital space. The trend should optimize hospital services, minimize unnecessary expenses and enhance the patient experience. The COVID-19 pandemic triggered the adoption of telehealth and telemedicine services, which will likely rise in the future. 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 utilized by hospitals. The companies are using the virtual health domain to heighten their efficiency by limiting the patients’ waiting time and trimming their treatment costs.
Zacks Industry Rank Indicates Bearish Outlook
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates dull near-term prospects. The Zacks Medical-Hospital industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #204, which places it in the bottom 18% 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. The industry’s earnings estimates for 2022 have decreased 16.1% in the past year. Given the lackluster near-term prospects, companies in the space are expected to take a hit.
Before we present the stocks that you may want to watch, 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 fared better than the Zacks S&P 500 composite as well as its broader sector over the past year. During this time period, the stocks in this industry have declined 17.7% compared with the S&P 500’s fall of 19.1% and the Zacks Medical sector’s decrease of 22.4%.
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 7.70X compared with the S&P 500’s 11.40X and the sector’s 7.66X.
Over the past five years, the industry has traded as high as 8.75X, as low as 5.57X and at a median of 7.74X as the charts below show.
EV/EBITDA Ratio (Past 5 Years)
4 Stocks to Watch For
We are presenting four stocks with a Zacks Ranks #3 (Hold) from the Medical-Hospital industry. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
HCA Healthcare: The company provides services via surgery centers, free-standing emergency rooms, physician clinics and urgent care centers. HCA’s inorganic growth strategies have led to increased patient volumes, network expansion across several markets and more hospitals in its portfolio. The company has been gaining from its telemedicine business line. HCA Healthcare also focuses on boosting shareholders’ value with dividend hikes and buybacks.
HCA expects current-year revenues in the band of $59.5-$61.5 billion, the mid-point of which indicates a rise of 3% from the 2021 figure. Given the current situation, profits are expected to continue increasing on the back of admissions. HCA beat earnings estimates twice in the past four quarters and missed on two occasions, the average surprise being 5%. Shares of the company have jumped 5.2% in the past month.
Price & Consensus: HCA
Acadia Healthcare: ACHC provides behavioral healthcare services in the United States and Puerto Rico. It has been emphasizing on acquisitions for expedited growth. Buyouts added facilities, beds and hospitals to Acadia Healthcare’s network and contributed to its top line. It is also actively pursuing JVs with renowned healthcare systems, which is helping it expand its capabilities through bed additions. The year 2022 is likely to be its strongest year in terms of JVs. Its moves to streamline its portfolio to boost efficiency and profitability are also noteworthy.
Acadia Healthcare expects current-year revenues in the band of $2.56-$2.60 billion, indicating an increase from the 2021 level of $2.3 billion. Adjusted EBITDA is projected to be $583-$613 million, implying an increase from $558.7 million in 2021. Adjusted earnings per share are forecast within $2.93-$3.18, calling for a rise from the 2021 level of $2.56. ACHC beat on earnings twice in the last four quarters, met the mark once and missed estimates on another occasion, the average surprise being 3.5%. Shares of ACHC have increased 0.7% in the past month.
Price & Consensus: ACHC
Universal Health Services: UHS focuses on behavioral indications like autism, eating disorders, sexual trauma and disorderliness in the military through its patriot support program. This segment holds immense scope for growth in the days ahead, considering the dire need to address behavioral health issues triggered by the pandemic. Universal Health’s plans to add new capacities in hospitals in important markets of Texas and California to address strong acute care demand are major positives. Earlier this year, the board of directors decided to increase its share buyback plan by $1.4 billion.
Universal Health expects net revenues for 2022 within $13,235-$13,371 million, indicating an increase from $12,642.1 million a year ago. The company expects adjusted earnings per share for this year in the range of $9.60 to $10.40. UHS beat earnings estimates twice in the past four quarters and missed on the other occasions. Shares of the company have risen 0.4% in the past month.
Price & Consensus: UHS
Tenet Healthcare Corporation: THC, with its subsidiaries, provides healthcare services, primarily through general hospitals and related healthcare facilities. The company has made several buyouts, partnerships and strategic alliances to augment the scale of business, operating capacity and geographical presence. Its performance has been stimulated by USPI Holding Company’s (Ambulatory Care) operations.
For the current year, THC’s net operating revenues are anticipated within $19-$19.4 billion. Adjusted EBITDA is still anticipated within $3,375-$3,575 million, suggesting 6% growth from the last year’s reported figure. Tenet Healthcare beat earnings estimates in each of the past four quarters, the average surprise being 87.4%. Even though shares of the company have declined 2.3% in the past month, its strong fundamentals are likely to help shares bounce back in the days ahead.
Price & Consensus: THC
(We are reissuing this article to correct a mistake. The original article, issued on October 20, 2022, should no longer be relied upon.)