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5 Hospital Stocks Set to Gain From Robust Industry Trends
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The near-term prospects of the Zacks Medical-Hospital industry will be shaped by various factors, including rising patient volumes, resumption of elective procedures, and technological and cybersecurity advancements. While increasing salaries and moderate staffing constraints will play a deterrent, the effects of it would be largely offset by higher revenue per admission. Consolidation activities are making a strong comeback in the hospital space.
Capacity expansions are expected to be prevalent as hospital companies aim to capture greater market share in a fragmented industry. Investments in technological upgrades will likely provide a competitive edge. Companies like HCA Healthcare, Inc. (HCA - Free Report) , Tenet Healthcare Corporation (THC - Free Report) , Universal Health Services, Inc. (UHS - Free Report) , Acadia Healthcare Company, Inc. (ACHC - Free Report) and Community Health Systems, Inc. (CYH - Free Report) will capitalize on these trends.
Industry Overview
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. 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 Key Trends Shaping the Industry
Increasing Patient Volumes: The resumption of deferred elective procedures post-pandemic has boosted patient volumes, admissions and utilization in recent quarters. According to the U.S. Census Bureau's revised report, the 65+ age group is expected to grow rapidly, driven by the large baby boom generation. This demographic's share of the population is forecasted to increase from 17.3% in 2022 to 20.6% by 2030 and 22.8% by 2050, supported by scientific and healthcare advancements. This is expected to drive up demand for hospital services. While concerns persist for patients regarding medical inflation, rising coverage costs and financial constraints, factors like the Affordable Care Act and other safety nets may offer some relief, aiding patient volume growth.
Countering Higher Expenses: The increase in patient volumes and utilization, coupled with growing costs for hospital supplies, salaries, wages and benefits amid inflationary pressures, is expected to escalate operating expenses for hospitals. Although there are some signs of improvement, staffing challenges continue to be a concern. To mitigate these issues, companies are strategically working on improving labor productivity and incorporating new technologies to optimize costs and boost efficiency. Growing revenue per admission will support its margins. Additionally, renegotiating contracts with suppliers and vendors will aid their cost management efforts and enhance operational efficiency.
Embracing the Digital Frontier: The ransomware attack on UnitedHealth Group's unit, Change Healthcare, in February 2024 highlights the critical need for continuous technological and cybersecurity advancements in the healthcare space. Hospital companies are increasingly integrating artificial intelligence (AI) and automation alongside real-time analytics to enhance care delivery. AI is improving clinical workflow management and medical diagnoses, leading to reduced patient wait times and treatment costs. The adoption of telehealth and telemedicine, which surged during the COVID-19 pandemic, is expected to maintain its growth momentum.
Resurgence inM&A Activity: Following a significant drop during the COVID-19 pandemic, merger-and-acquisition (M&A) activity within hospitals and health systems is on the rise. The fragmented industry is likely to see a surge in M&A deals and partnership agreements over the coming quarters, which are expected to aid capacity expansionary efforts. A Deloitte report indicates that 86% of surveyed health system executives anticipate M&A to play a crucial role in their 2024 strategic plans. Business consolidation, new technology partnerships and evolving business models to improve patient experience are expected to significantly boost profitability for hospital operators.
Zacks Industry Rank Indicates Bullish Trends
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, signals bullish near-term prospects. The Zacks Medical-Hospital industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #31, which places it in the top 12% of nearly 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
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 optimistic about this group’s earnings growth potential. As a matter of fact, the industry’s earnings estimates for 2024 have climbed 7.3% in the past year.
Before we present the stocks that you may want to monitor, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector but Lags S&P 500
The Zacks Medical-Hospital industry has fared better than its broader sector over the past year but lagged the Zacks S&P 500 composite. During this period, the stocks in this industry have gained 23.3% compared with the Zacks Medical sector’s 6.2% growth. The S&P 500 index jumped 26.1% during this time.
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 8.37X compared with the S&P 500’s 14.65X and the sector’s 13.42X.
Over the past five years, the industry has traded as high as 9.55X and as low as 5.57X, with a median of 7.84X, as the charts below show.
EV/EBITDA Ratio (Past 5 Years)
5 Stocks Worth Your Attention
Tenet Healthcare Corporation: The company delivers a broad range of healthcare services, mainly through general hospitals and associated healthcare units. Increasing patient volumes are driving substantial revenue growth in both the Ambulatory Care and Hospital segments. The Ambulatory Care unit, particularly strengthened by the strong performance of its USPI division, plays a significant role in this success. Strategic tuck-in acquisitions further boost the company's overall performance, while contractual rate increases in the Conifer unit enhance financial results. Additionally, the company proactively divests non-core assets to improve profitability.
The Zacks Consensus Estimate for THC’s 2024 bottom line is pegged at $8.42 per share, which indicates 20.6% year-over-year growth. Tenet Healthcare beat earnings estimates in all the past four quarters, the average surprise being 56.5%. The consensus mark for 2024 revenues is pegged at $20.3 billion. Shares of the company have gained 86.5% over the past year. It sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: THC
HCA Healthcare: The company operates general and acute care hospitals and related facilities. With growing patient volumes and admissions, HCA is well-positioned for growth. Its expansion into telemedicine is projected to boost revenues and diversify its portfolio. Also, its Managed Medicare operations are poised to drive its performance. Through strategic acquisitions and a focus on enhancing shareholder value via dividend hikes and share buybacks, HCA is scaling its business and prioritizing investor returns, respectively.
The Zacks Consensus Estimate for one of the biggest for-profit publicly traded hospitals’ 2024 EPS indicates 9.6% year-over-year growth. HCA Healthcare beat earnings estimates thrice in the past four quarters and missed once, the average surprise being 5.6%. The consensus mark for 2024 revenues signals a 6.9% increase from a year ago. Shares of the company have jumped 20.5% over the past year. It currently has a Zacks Rank #3 (Hold).
Price & Consensus: HCA
Universal Health Services: The company manages acute care facilities, outpatient centers and behavioral health care units, specializing in areas such as autism, eating disorders, substance use disorder and military-related issues through its Patriot Support Program. The company is experiencing growth due to increasing patient days and a comprehensive care network. The expansion of licensed beds in acute care hospitals and strategic joint ventures in the behavioral health portfolio is expected to drive further growth.
The Zacks Consensus Estimate for Universal Health’s 2024 bottom line indicates 29.4% year-over-year growth. UHS beat earnings estimates in all the past four quarters, the average surprise being 8.1%. The consensus mark for its 2024 revenues signals an 8.4% increase from a year ago. Shares of the company have gained 37.8% in the past year. It has a Zacks Rank #3 at present.
Price & Consensus: UHS
Acadia Healthcare: The company provides behavioral healthcare services in the United States and Puerto Rico. Its performance is bolstered by increasing patient volumes, rising admissions, and the expansion of service lines into new states. ACHC expects to add more than 400 beds to existing facilities in 2024 and inaugurate a maximum of 14 CTCs this year. The company's commitment to expanding its capabilities is evident through its active pursuit of joint ventures with reputable healthcare systems.
The Zacks Consensus Estimate for ACHC’s 2024 bottom line indicates 2.6% year-over-year growth. The consensus mark for 2024 revenues signals a 9.3% increase from a year ago. ACHC beat on earnings in each of the last four quarters, the average surprise being 6.4%. It has a Zacks Rank #3 at present. Although shares of the company fell 8.4% in the past year, its improving operations are expected to support a future rebound.
Price & Consensus: ACHC
Community Health Systems:The company is a leading operator of general acute care hospitals and outpatient facilities across the United States. Its strong performance is driven by rising patient volumes and improved occupancy rates. With a strategic emphasis on telehealth, CYH is well-positioned for long-term growth. The company seeks acquisitions in hospitals where it can add value by expanding specialty medical services and achieving economies of scale. Additionally, it actively divests non-core assets to enhance profitability, same-store metrics, and cash flow.
The Zacks Consensus Estimate for CYH’s 2024 bottom line indicates a 77% improvement from a year ago. Over the past four quarters, it beat earnings estimates twice and missed on other occasions. The consensus mark for its 2024 revenues is pegged at $12.5 billion. Shares of the company have gained 16.6% in the past year. It has a Zacks Rank #3 at present.
Price & Consensus: CYH
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5 Hospital Stocks Set to Gain From Robust Industry Trends
The near-term prospects of the Zacks Medical-Hospital industry will be shaped by various factors, including rising patient volumes, resumption of elective procedures, and technological and cybersecurity advancements. While increasing salaries and moderate staffing constraints will play a deterrent, the effects of it would be largely offset by higher revenue per admission. Consolidation activities are making a strong comeback in the hospital space.
Capacity expansions are expected to be prevalent as hospital companies aim to capture greater market share in a fragmented industry. Investments in technological upgrades will likely provide a competitive edge. Companies like HCA Healthcare, Inc. (HCA - Free Report) , Tenet Healthcare Corporation (THC - Free Report) , Universal Health Services, Inc. (UHS - Free Report) , Acadia Healthcare Company, Inc. (ACHC - Free Report) and Community Health Systems, Inc. (CYH - Free Report) will capitalize on these trends.
Industry Overview
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. 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 Key Trends Shaping the Industry
Increasing Patient Volumes: The resumption of deferred elective procedures post-pandemic has boosted patient volumes, admissions and utilization in recent quarters. According to the U.S. Census Bureau's revised report, the 65+ age group is expected to grow rapidly, driven by the large baby boom generation. This demographic's share of the population is forecasted to increase from 17.3% in 2022 to 20.6% by 2030 and 22.8% by 2050, supported by scientific and healthcare advancements. This is expected to drive up demand for hospital services. While concerns persist for patients regarding medical inflation, rising coverage costs and financial constraints, factors like the Affordable Care Act and other safety nets may offer some relief, aiding patient volume growth.
Countering Higher Expenses: The increase in patient volumes and utilization, coupled with growing costs for hospital supplies, salaries, wages and benefits amid inflationary pressures, is expected to escalate operating expenses for hospitals. Although there are some signs of improvement, staffing challenges continue to be a concern. To mitigate these issues, companies are strategically working on improving labor productivity and incorporating new technologies to optimize costs and boost efficiency. Growing revenue per admission will support its margins. Additionally, renegotiating contracts with suppliers and vendors will aid their cost management efforts and enhance operational efficiency.
Embracing the Digital Frontier: The ransomware attack on UnitedHealth Group's unit, Change Healthcare, in February 2024 highlights the critical need for continuous technological and cybersecurity advancements in the healthcare space. Hospital companies are increasingly integrating artificial intelligence (AI) and automation alongside real-time analytics to enhance care delivery. AI is improving clinical workflow management and medical diagnoses, leading to reduced patient wait times and treatment costs. The adoption of telehealth and telemedicine, which surged during the COVID-19 pandemic, is expected to maintain its growth momentum.
Resurgence in M&A Activity: Following a significant drop during the COVID-19 pandemic, merger-and-acquisition (M&A) activity within hospitals and health systems is on the rise. The fragmented industry is likely to see a surge in M&A deals and partnership agreements over the coming quarters, which are expected to aid capacity expansionary efforts. A Deloitte report indicates that 86% of surveyed health system executives anticipate M&A to play a crucial role in their 2024 strategic plans. Business consolidation, new technology partnerships and evolving business models to improve patient experience are expected to significantly boost profitability for hospital operators.
Zacks Industry Rank Indicates Bullish Trends
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, signals bullish near-term prospects. The Zacks Medical-Hospital industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #31, which places it in the top 12% of nearly 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
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 optimistic about this group’s earnings growth potential. As a matter of fact, the industry’s earnings estimates for 2024 have climbed 7.3% in the past year.
Before we present the stocks that you may want to monitor, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector but Lags S&P 500
The Zacks Medical-Hospital industry has fared better than its broader sector over the past year but lagged the Zacks S&P 500 composite. During this period, the stocks in this industry have gained 23.3% compared with the Zacks Medical sector’s 6.2% growth. The S&P 500 index jumped 26.1% during this time.
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 8.37X compared with the S&P 500’s 14.65X and the sector’s 13.42X.
Over the past five years, the industry has traded as high as 9.55X and as low as 5.57X, with a median of 7.84X, as the charts below show.
EV/EBITDA Ratio (Past 5 Years)
5 Stocks Worth Your Attention
Tenet Healthcare Corporation: The company delivers a broad range of healthcare services, mainly through general hospitals and associated healthcare units. Increasing patient volumes are driving substantial revenue growth in both the Ambulatory Care and Hospital segments. The Ambulatory Care unit, particularly strengthened by the strong performance of its USPI division, plays a significant role in this success. Strategic tuck-in acquisitions further boost the company's overall performance, while contractual rate increases in the Conifer unit enhance financial results. Additionally, the company proactively divests non-core assets to improve profitability.
The Zacks Consensus Estimate for THC’s 2024 bottom line is pegged at $8.42 per share, which indicates 20.6% year-over-year growth. Tenet Healthcare beat earnings estimates in all the past four quarters, the average surprise being 56.5%. The consensus mark for 2024 revenues is pegged at $20.3 billion. Shares of the company have gained 86.5% over the past year. It sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: THC
HCA Healthcare: The company operates general and acute care hospitals and related facilities. With growing patient volumes and admissions, HCA is well-positioned for growth. Its expansion into telemedicine is projected to boost revenues and diversify its portfolio. Also, its Managed Medicare operations are poised to drive its performance. Through strategic acquisitions and a focus on enhancing shareholder value via dividend hikes and share buybacks, HCA is scaling its business and prioritizing investor returns, respectively.
The Zacks Consensus Estimate for one of the biggest for-profit publicly traded hospitals’ 2024 EPS indicates 9.6% year-over-year growth. HCA Healthcare beat earnings estimates thrice in the past four quarters and missed once, the average surprise being 5.6%. The consensus mark for 2024 revenues signals a 6.9% increase from a year ago. Shares of the company have jumped 20.5% over the past year. It currently has a Zacks Rank #3 (Hold).
Price & Consensus: HCA
Universal Health Services: The company manages acute care facilities, outpatient centers and behavioral health care units, specializing in areas such as autism, eating disorders, substance use disorder and military-related issues through its Patriot Support Program. The company is experiencing growth due to increasing patient days and a comprehensive care network. The expansion of licensed beds in acute care hospitals and strategic joint ventures in the behavioral health portfolio is expected to drive further growth.
The Zacks Consensus Estimate for Universal Health’s 2024 bottom line indicates 29.4% year-over-year growth. UHS beat earnings estimates in all the past four quarters, the average surprise being 8.1%. The consensus mark for its 2024 revenues signals an 8.4% increase from a year ago. Shares of the company have gained 37.8% in the past year. It has a Zacks Rank #3 at present.
Price & Consensus: UHS
Acadia Healthcare: The company provides behavioral healthcare services in the United States and Puerto Rico. Its performance is bolstered by increasing patient volumes, rising admissions, and the expansion of service lines into new states. ACHC expects to add more than 400 beds to existing facilities in 2024 and inaugurate a maximum of 14 CTCs this year. The company's commitment to expanding its capabilities is evident through its active pursuit of joint ventures with reputable healthcare systems.
The Zacks Consensus Estimate for ACHC’s 2024 bottom line indicates 2.6% year-over-year growth. The consensus mark for 2024 revenues signals a 9.3% increase from a year ago. ACHC beat on earnings in each of the last four quarters, the average surprise being 6.4%. It has a Zacks Rank #3 at present. Although shares of the company fell 8.4% in the past year, its improving operations are expected to support a future rebound.
Price & Consensus: ACHC
Community Health Systems:The company is a leading operator of general acute care hospitals and outpatient facilities across the United States. Its strong performance is driven by rising patient volumes and improved occupancy rates. With a strategic emphasis on telehealth, CYH is well-positioned for long-term growth. The company seeks acquisitions in hospitals where it can add value by expanding specialty medical services and achieving economies of scale. Additionally, it actively divests non-core assets to enhance profitability, same-store metrics, and cash flow.
The Zacks Consensus Estimate for CYH’s 2024 bottom line indicates a 77% improvement from a year ago. Over the past four quarters, it beat earnings estimates twice and missed on other occasions. The consensus mark for its 2024 revenues is pegged at $12.5 billion. Shares of the company have gained 16.6% in the past year. It has a Zacks Rank #3 at present.
Price & Consensus: CYH