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The operating environment for hospital companies is improving with increasing non-Covid utilization, outpatient surgeries and patient days. Staffing challenges are expected to decrease this year. However, recession fears, inflation and resultant escalating costs are eating up Zacks Medical-Hospital industry players' margins.
Growing competition in this market remains a common theme. Technological innovations and adoptions are expected to continue boosting hospital companies' efficiency and generating cost savings. Leading industry players like HCA Healthcare Inc., Universal Health Services Inc., Acadia Healthcare Co. and Tenet Healthcare Corp. 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.
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 to Watch in the Hospital Industry
Improving Volumes: Going ahead, non-COVID admissions are expected to continue rising as the intensity of COVID-related utilization of resources declines. Demand for elective procedures is expected to drive patient volumes. Growth in admissions, outpatient surgeries and Medicare reimbursements and deferred procedures can support hospital companies' revenues. However, inflationary pressures and financial constraints can force patients to delay addressing some non-emergency medical needs. The benefits of the Affordable Care Act and similar safety nets can provide customers with some respite, which can help patients navigate tough times.
Increasing Expenses: With rising patient volumes, operating costs are bound to go up. High salaries, wages and benefits and increasing costs of hospital supplies due to inflation will likely reduce margins. Also, growth-project investments 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. Moreover, renegotiating contracts with suppliers and vendors will provide an impetus.
Growth in the Elderly Population: Steady advancements in science, nutrition and healthcare enable 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 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. Plus, the increasing number of people signing up for healthcare plans through the Affordable Care Act indicates fewer challenges to visiting hospitals in the future.
Technological Improvements: Technological innovations, improvements and wider adoption will continue to 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 hospitals utilize. 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 #216, which places it in the bottom 14% 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 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. The industry's earnings estimates for 2023 have declined 19.1% 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 0.5% compared with the S&P 500's fall of 14.1% and the Zacks Medical sector's decrease of 10.4%.
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 8.21X compared with the S&P 500's 12.09X and the sector's 8.37X.
Over the past five years, the industry has traded as high as 8.75X, as low as 5.57X and at a median of 7.76X.
HCA Healthcare: The company provides services via surgery centers, free-standing emergency rooms, physician clinics and urgent care centers. HCA's inorganic growth strategies enable it to persistently increase patient volumes, expand its network across several markets and add 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.
The Zacks Consensus Estimate for HCA Healthcare's 2023 EPS indicates 7.2% year-over-year growth. The consensus mark for its revenues in 2023 signals 3.8% increase from a year ago. HCA beat earnings estimates twice in the past four quarters and missed on two occasions, the average surprise being 2.3%. Shares of the company have jumped 8.4% in the past month.
Universal Health Services: The company 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. UHS' plans to add new capacities in hospitals in important markets of Texas and California to address strong acute care demand are expected to be major tailwinds. It has a strong share buyback plan in place to boost shareholder value.
The Zacks Consensus Estimate for Universal Health's 2023 bottom line indicates 8.7% year-over-year growth. The consensus mark for its revenues in 2023 signals 4.4% increase from a year ago. UHS beat earnings estimates thrice in the past four quarters and missed on one occasion, the average surprise being 0.7%. Shares of the company have risen 9.9% in the past month.
Acadia Healthcare: ACHC provides behavioral healthcare services in the United States and Puerto Rico. It has been emphasizing on buyouts and new additions for robust growth. Acquisitions added facilities, beds and hospitals to Acadia Healthcare's network and contributed to its top line. It is also actively pursuing joint ventures with renowned healthcare systems, which is helping it expand its capabilities through bed additions. The company is expected to have added a total of roughly 300 beds in 2022. Its moves to streamline its portfolio boost operating efficiency and profitability.
The Zacks Consensus Estimate for ACHC's 2023 bottom line indicates 6.9% year-over-year growth. The consensus mark for its revenues in 2023 signals 8.9% increase from a year ago. 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 3.9% in the past month.
Tenet Healthcare Corp.: THC, with its subsidiaries, provides healthcare services, primarily through general hospitals and related healthcare facilities. It has made multiple acquisitions, forged partnerships and strategic alliances to augment the scale of business, operating capacity and geographical presence. Tenet Healthcare's performance has been kindled by USPI Holding Company's (Ambulatory Care) operations.
The Zacks Consensus Estimate for THC's 2023 bottom line is pegged at $5.56 per share, which remained stable over the past month. The consensus mark for its revenues in 2023 signals 4.6% increase from the prior year. Tenet Healthcare beat earnings estimates in each of the past four quarters, the average surprise being 69.9%. Shares of the company have risen 18.6% in the past month.
Why Haven't You Looked at Zacks' Top Stocks?
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights HCA Healthcare, Universal Health Services, Acadia Healthcare and Tenet Healthcare
For Immediate Release
Chicago, IL – January 18, 2023 – Today, Zacks Equity Research discusses HCA Healthcare Inc. (HCA - Free Report) , Universal Health Services Inc. (UHS - Free Report) , Acadia Healthcare Co. (ACHC - Free Report) and Tenet Healthcare Corp. (THC - Free Report) .
Industry: Hospital
Link: https://www.zacks.com/commentary/2039974/investors-should-watch-these-4-hospital-stocks-despite-headwinds
The operating environment for hospital companies is improving with increasing non-Covid utilization, outpatient surgeries and patient days. Staffing challenges are expected to decrease this year. However, recession fears, inflation and resultant escalating costs are eating up Zacks Medical-Hospital industry players' margins.
Growing competition in this market remains a common theme. Technological innovations and adoptions are expected to continue boosting hospital companies' efficiency and generating cost savings. Leading industry players like HCA Healthcare Inc., Universal Health Services Inc., Acadia Healthcare Co. and Tenet Healthcare Corp. 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.
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 to Watch in the Hospital Industry
Improving Volumes: Going ahead, non-COVID admissions are expected to continue rising as the intensity of COVID-related utilization of resources declines. Demand for elective procedures is expected to drive patient volumes. Growth in admissions, outpatient surgeries and Medicare reimbursements and deferred procedures can support hospital companies' revenues. However, inflationary pressures and financial constraints can force patients to delay addressing some non-emergency medical needs. The benefits of the Affordable Care Act and similar safety nets can provide customers with some respite, which can help patients navigate tough times.
Increasing Expenses: With rising patient volumes, operating costs are bound to go up. High salaries, wages and benefits and increasing costs of hospital supplies due to inflation will likely reduce margins. Also, growth-project investments 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. Moreover, renegotiating contracts with suppliers and vendors will provide an impetus.
Growth in the Elderly Population: Steady advancements in science, nutrition and healthcare enable 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 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. Plus, the increasing number of people signing up for healthcare plans through the Affordable Care Act indicates fewer challenges to visiting hospitals in the future.
Technological Improvements: Technological innovations, improvements and wider adoption will continue to 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 hospitals utilize. 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 #216, which places it in the bottom 14% 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 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. The industry's earnings estimates for 2023 have declined 19.1% 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 0.5% compared with the S&P 500's fall of 14.1% and the Zacks Medical sector's decrease of 10.4%.
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 8.21X compared with the S&P 500's 12.09X and the sector's 8.37X.
Over the past five years, the industry has traded as high as 8.75X, as low as 5.57X and at a median of 7.76X.
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 enable it to persistently increase patient volumes, expand its network across several markets and add 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.
The Zacks Consensus Estimate for HCA Healthcare's 2023 EPS indicates 7.2% year-over-year growth. The consensus mark for its revenues in 2023 signals 3.8% increase from a year ago. HCA beat earnings estimates twice in the past four quarters and missed on two occasions, the average surprise being 2.3%. Shares of the company have jumped 8.4% in the past month.
Universal Health Services: The company 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. UHS' plans to add new capacities in hospitals in important markets of Texas and California to address strong acute care demand are expected to be major tailwinds. It has a strong share buyback plan in place to boost shareholder value.
The Zacks Consensus Estimate for Universal Health's 2023 bottom line indicates 8.7% year-over-year growth. The consensus mark for its revenues in 2023 signals 4.4% increase from a year ago. UHS beat earnings estimates thrice in the past four quarters and missed on one occasion, the average surprise being 0.7%. Shares of the company have risen 9.9% in the past month.
Acadia Healthcare: ACHC provides behavioral healthcare services in the United States and Puerto Rico. It has been emphasizing on buyouts and new additions for robust growth. Acquisitions added facilities, beds and hospitals to Acadia Healthcare's network and contributed to its top line. It is also actively pursuing joint ventures with renowned healthcare systems, which is helping it expand its capabilities through bed additions. The company is expected to have added a total of roughly 300 beds in 2022. Its moves to streamline its portfolio boost operating efficiency and profitability.
The Zacks Consensus Estimate for ACHC's 2023 bottom line indicates 6.9% year-over-year growth. The consensus mark for its revenues in 2023 signals 8.9% increase from a year ago. 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 3.9% in the past month.
Tenet Healthcare Corp.: THC, with its subsidiaries, provides healthcare services, primarily through general hospitals and related healthcare facilities. It has made multiple acquisitions, forged partnerships and strategic alliances to augment the scale of business, operating capacity and geographical presence. Tenet Healthcare's performance has been kindled by USPI Holding Company's (Ambulatory Care) operations.
The Zacks Consensus Estimate for THC's 2023 bottom line is pegged at $5.56 per share, which remained stable over the past month. The consensus mark for its revenues in 2023 signals 4.6% increase from the prior year. Tenet Healthcare beat earnings estimates in each of the past four quarters, the average surprise being 69.9%. Shares of the company have risen 18.6% in the past month.
Why Haven't You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.