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Nursing Industry Outlook Bright on Low-Cost Care & Demography

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Companies in the Zacks Medical-Nursing Home industry provide long-term skilled nursing care and social services. The industry includes skilled nursing facilities for recovery from acute or chronic medical conditions, mental health and substance abuse facilities, and various types of independent living, community care and assisted living arrangements.

Nursing homes typically care for patients recovering from major medical procedures and older patients with chronic disabilities and deteriorating mental and physical capacities. A wide array of healthcare and dependent-care services are provided, including 24-hour nursing care, physical therapy, and help with activities of daily living — such as bathing, eating and dressing, housekeeping, food service, personal services, and leisure activities.

Here are the industry’s three major themes:

  • Increased Demand Driven by Aging Population and Higher Life Expectancy: As life expectancy continues to increase in the United States and seniors account for a higher percentage of the total U.S. population, overall demand for healthcare services for seniors will increase. At present, the primary market demographic for skilled nursing services is individuals aged 75 and older. According to the 2018 U.S. Census, between 2010 and 2030, the number of individuals aged more than 65 is projected to nearly double from 39 million to 73 million, a growth rate nearly 5 times faster than the 17% increase expected for the total population. ,
     
  • Shift of Patient Care to Lower Cost Alternatives: The growth of the senior population in the United States continues to increase healthcare costs, often faster than the available funding from government-sponsored healthcare programs. In response, federal and state governments have adopted cost-containment measures that encourage the treatment of patients in more cost-effective settings, such as skilled nursing facilities, for which staffing requirements and associated costs are significantly lower than acute care hospitals and other post-acute care settings. As a result, skilled nursing facilities are generally serving a larger population of higher-acuity patients than in the past, thus driving the industry.
     
  • Significant Acquisition and Consolidation Opportunities: The skilled nursing industry is large and highly fragmented, characterized predominantly by numerous local and regional providers. Due to increasing demands from hospitals and insurance carriers to implement sophisticated and expensive reporting systems, this fragmentation provides significant acquisition and consolidation opportunities for the players.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. The Zacks Medical-Nursing Home industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #5, which places it at the top 2% of more than 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.

In a year’s time, the industry’s EPS estimates for the current year have gone up 7.3%.

Before we present few nursing home 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 Underperforms S&P 500 But Fares Better Than Its Sector

The Zacks Medical-Nursing Home industry has underperformed the Zacks S&P 500 composite but has fared better than its own sector in the past year. The stocks in this industry have collectively lost 3.6% in the past year and the Medical sector has declined 5.8%. Meanwhile, the Zacks S&P 500 composite has gained 0.3%.

Industry’s Current Valuation

On the basis of trailing 12-month Enterprise Value to EBITDA (EV/EBITDA) ratio, which is commonly used for valuing nursing home stocks, the industry is currently trading at 16.6X compared with the S&P 500’s 10.5X and the sector’s 20.7X.

Over the past five years, the industry has traded as high as 16.9X, as low as 4.1X and at the median of 5.7X.

EV/EVIBTDA TTM



EV/EVIBTDA TTM

Bottom Line

Investment in medical technology and upgrade of systems and procedures to provide efficient services will keep costs high. Reimbursement pressure from government and consolidation in the health insurance space will result in stiff competition.

Nevertheless, the changing demography of the United Sates with increasing senior population will continue to drive demand for nursing home services.
Stocks to Consider

Investors may consider buying the following stocks that carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Capital Senior Living Corp. (CSU - Free Report) is one of the largest providers of senior living services in the United States.

The stock has declined 55% in a year’s time. The company has an estimated earnings growth rate of 19.2% for the next 5 years compared with the industry’s growth rate of 14.3%.

Price and Consensus: CSU

Brookdale Senior Living Inc. (BKD - Free Report) is a leading owner and operator of senior living facilities throughout the United States.

The stock has declined 28.5% in a year’s time. The company has an estimated earnings growth rate of 13% for the next five years compared with the industry’s growth rate of 14.3%.

The company surpassed estimates in three of the last four quarters, the positive earnings surprise being 11.1%.

Price and Consensus: BKD

Genesis Healthcare, Inc. (GEN - Free Report) provides long-term care, assisted/senior living and rehabilitation therapy.

The stock has lost 49% in a year’s time. The company has an estimated earnings growth rate of 10% for 2019 compared with the industry’s growth rate of 14.3%.

Price and Consensus: GEN



The Ensign Group, Inc. (ENSG - Free Report) provides a broad spectrum of skilled nursing and assisted living services, physical, occupational and speech therapies, home health and hospice services and other rehabilitative and health care services at health care facilities, hospice agencies, home health agencies and home care businesses.

The stock has gained 45% in a year’s time. The company has an estimated earnings growth rate of 15% for 2019, compared with the industry’s growth rate of 14.3%.

The company surpassed estimates in each of the last four quarters, the positive earnings surprise being 3.1%.

Price and Consensus: ENSG




 

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