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Dose of Bright Near-Term Outlook From Medical-Hospital Industry

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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 hospitals are engaged in internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, mental health care, and diagnostic and emergency services among others.

Hospital companies receive payments for patient services from the federal government under the Medicare program, state governments under their respective Medicaid or similar programs, managed care plans (including plans offered through the American Health Benefit Exchanges), private insurers and directly from patients.

Let us take a look at the industry’s three major themes:

  • The industry is witnessing increased investment in technology. Players are making investments in health technologies and working toward harnessing the power of big data to efficiently test methodologies, discover trends and provide information to support their physicians and clinicians in their continuous struggle to improve the quality of care. This should ultimately lead to lower cost and lead to higher patient admissions, thus aiding both revenues and margins.
     
  • The industry has over the past few years started consolidating mainly due to the pressures of healthcare reform. Players are continuing to resort to mergers and acquisitions in order to create operational, strategic, and financial value for their operations. Numerous deals have lead to economies of scale, helping the industry to efficiently manage costs and improve productivity and outcomes through higher business volumes, and enhancing the bargaining power with payers. This consolidation paves the way for long-term growth.
     
  • The number of Americans 65 and older is projected to grow by 34% between 2015 and 2030 — and by 2035, older adults will outnumber children for the first time in U.S. history, according to the U.S. Census Bureau. Also, due to the anticipated increase in life expectancy of Americans, the number of people aged 85 years and older may grow from 6 million in 2015 to 9 million by the year 2030. This anticipated increase in life expectancy will spur demand for healthcare services and, more importantly, demand for innovative, more-sophisticated means of delivering those services. Hospitals, as the largest category of care in the healthcare market, will be among those boosted most directly by this rise in demand.  


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-Hospital industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #52, which places it in the top 20% 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.

The industry’s position in the top 20% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential.

Given the industry’s bright near-term view, we will present some hospital stocks that one should hold on to. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Beats Sector But Lags the Market

The Zacks Medical-Hospital industry has outperformed the broader Zacks Medical sector, but has lagged the Zacks S&P 500 composite over the past year.

Over this period, the industry has gained 10.99% versus the broader sector’s growth of 5.65% and the Zacks S&P 500 composite’s rise of 25.05%.
 

One-Year Price Performance


 
Industry’s Current Valuation

On the basis of trailing 12-month EV to EBITDA ratio, which is commonly used for valuing hospital stocks, the industry trades at 7.12X versus the S&P 500’s 12.38X and the sector’s 10.72X.

Over the past five years, the industry has traded as high as 8.81X, as low as 6.58X and at a median of 7.45X, as the chart below shows.

Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs S&P 500



 
Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs Sector



 
Bottom Line

Focus on an expanding footprint and product portfolio through acquisitions, along with cost-saving initiatives, are expected to drive the industry’s growth. The efforts on the part of hospital companies to expand their healthcare network that provides convenience and choice to patients should drive admissions. Investments in technology will increase the efficiency of operations thus leading to superior care at lower costs, which should benefit all sections of the industry.

However, rising labor costs from shortage of nurses and skilled workforce have weighed on the industry’s labor expense and will continue to do so.
At present, among the hospital socks under our coverage, only Community Health Systems, Inc. (CYH - Free Report) holds a Zacks Rank #1 (Strong Buy), while most of the others carry a Zacks Rank#3 (Hold). You can see the complete list of today's Zacks #1 Rank stocks here.

Community Health Systems is  the largest publicly traded hospital companies in the United States and a leading operator of general acute care hospitals and outpatient facilities in communities in communities across the country. The Zacks Consensus Estimate for 2020 EPS indicates year-over-year growth of 10.2%.

Price & Consensus: CYH

Here we present four stocks with a Zacks Rank #3 (Hold) that investors may want to hold on to for the time being.

HCA Healthcare, Inc. (HCA - Free Report) : This, Nashville, TN-based hospital operates a network of acute care hospitals, outpatient facilities, clinics and other patient care delivery settings. The Zacks Consensus Estimate for 2020 EPS indicates year-over-year growth of  10.44%.

Price & Consensus: HCA

Universal Health Services, Inc. (UHS - Free Report) : This King of Prussia, PA-based hospital company operates behavioral health facilities, acute care hospitals and ambulatory centers throughout the United States, the United Kingdom and Puerto Rico. The consensus estimate for  2020 earnings indicates year-over-year growth of  8.57%.

Price & Consensus: UHS

Acadia Healthcare Company, Inc. (ACHC - Free Report) : This Franklin, TN-based hospital provides inpatient behavioral health care services. It offers psychiatric and chemical dependency services, including inpatient psychiatric hospitals, residential treatment centers, outpatient clinics and therapeutic school-based programs. The consensus estimate for 2020 earnings indicates year-over-year growth of 14.5%.

Price & Consensus: ACHC
 

Tenet Healthcare Corp. (THC - Free Report) : This Dallas, TX-based company provides technology-enabled performance improvement and health management solutions to hospitals, health systems, integrated delivery networks, physician groups, self-insured organizations and health plans. The consensus estimate for  2020 earnings indicates year-over-year growth of  4.30%.

Price & Consensus: THC

 


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