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Hospital Industry's Dull Near-Term Outllook Induced by Coronavirus

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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.

Here are the industry’s four major themes:

•    Hospital companies are bearing the brunt of coronavirus-induced loss of revenues. To make room for accommodating and serving the COVID-19-infected patients, hospital companies have been directed by the federal and state governments to suspend certain operations, especially elective business, which is mostly surgical and generally more profitable than medical business. Additionally, emergency room visits declined significantly because of general concerns over COVID-19 and the enforcement of sheltering-at-home policies. Nevertheless, with easing of restrictions, hospital companies are witnessing a surge in admissions. For instance HCA Healthcare, Inc. (HCA - Free Report) , Tenet Healthcare, Universal Health Services, Amedisys (AMED - Free Report) witnessed volume recovery in May. However, the pace of rebound will be crucial in bolstering the top-line performance of these players.

•    Along with enduring revenue declines, hospital companies are witnessing an elevation in costs. Hospitals planning for COVID-19 included updating clinical policies and operational guidance, preparing supply chain with added inventory levels, drugs and ventilator equipment. It also included building approaches to add capacity for a potential spurt in patient volumes, utilizing data, initiating emergency operations center, etc.  Hospitals spent more money on protective equipment, such as masks, gowns, gloves and face shields, apart from certain types of staffing to deal with a spike in coronavirus patients. This, in turn, flared up costs, thereby causing a twin blow to hospital, which are already suffering revenue declines.

•    The Department of Health and Human Services disbursed $72 billion in grants since April to hospitals and other health care providers through the bailout program, which was part of the coronavirus economic stimulus package. The department plans to eventually distribute more than $100 billion. These funds are aimed at reliving hospitals from the loss incurred due to COVID-19 business disruption. Though many hospitals received government aids, for many, the funding isn’t adequate to compensate for the revenue drainage that occurred since the pandemic struck. Some resorted to furloughing employees, cutting executives’ pay or requiring staff to work for reduced hours. Others looked into options like deferring employee pension contributions and payroll taxes or getting advanced Medicare payments,  maneuvers that help them stay afloat during financial exigencies. There’s still a big gulf between what hospitals received and the amount that’s remaining. The American Hospital Association estimated that between Mar 1 and Jun 30, hospitals and health systems will lose a combined $202.6 billion or  average of $50.7 billion per month.
 
Zacks Industry Rank Indicates Cloudy Prospects

The Zacks Medical-Hospital industry is housed within the broader Zacks Medical sector. It carries a Zacks Industry Rank #200, which places it in the bottom 21% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bearish near-term prospects. 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 about this group’s earnings growth potential. Since May 31, 2019, the industry’s earnings estimate for the current year has moved 65.7% south.

Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and the valuation picture.

Industry Lags S&P 500 & Sector

The Zacks Medical-Hospital industry has underperformed the Zacks S&P 500 composite as well as its own sector in the past year.

The stocks in this industry have lost 13.3% against the S&P 500’s rise of 7.4%. Meanwhile, the Zacks Medical sector has gained 4.1% in the same time frame.

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 6.2X compared with the S&P 500’s 11.07X and the sector’s 10.3X.

EV/EBITDA TTM

EV/EBITDA TTM

 

Over the past five years, the industry has traded as high as 8.87X, as low as 5.12X and at a median of 7.39X as the chart below shows.

Bottomline

Despite the initial hiccups from the near-term uncertain business and a tough economic environment created by the COVID-19 outbreak, demand for hospital services over the long haul is slated to soar on the back of the rising incidence of the pandemic.

Stocks in Focus

At present, among the hospital socks under our coverage, only Avita Medical Ltd. (RCEL - Free Report) currently holds a Zacks Rank #2 (Buy) while most others carry a Zacks Rank#3 (Hold). You can see the complete list of today's Zacks #1 Rank stocks here.

Avita Medical Ltd. operates as a medical technology company. It develops and distributes products in Regenerative and Respiratory Medicine. Avita's regenerative and tissue-engineered products provide revolutionary solutions, utilizing the patient's own skin and the regenerative capability of the human body to treat a wide range of wounds, scars and skin defects. The Zacks Consensus Estimate for current-year earnings is pegged at 7.7% growth.

Price & Consensus: RCEL

Community Health Systems (CYH - Free Report) 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 company has surpassed estimates in three of the past four quarters (missed in one) with an average positive surprise of 10.06%.

Price & Consensus: CYH

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 company has surpassed estimates in three of the past four quarters (missed in one) with an average positive surprise of 4.77%.

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 company has surpassed estimates in three of the past four quarters (missed in one) with an average positive surprise of 141.44%.

Price & Consensus: THC

 

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