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4 Hospital Stocks to Gain from Improving Admissions, Federal Aid

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While the Zacks Medical-Hospital industry was at the receiving end of the coronavirus pandemic, which caused a decline in elective procedures and consequently, dried up the revenues, federal dollars came to the industry’s rescue to minimize its damages to a certain extent..

Now the gradual recovery in patient admission volumes and steadfast cost-cutting measures aided the industry players’ profit margins. Leading hospital companies like HCA Healthcare Inc. (HCA), Universal Health Services Inc. (UHS), Acadia Healthcare Company, Inc. (ACHC) and Tenet Healthcare Corporation (THC) are set to benefit from these developments.

About the Industry

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.

3 Hospital Industry Trends to Watch Out for

Gradual Revival of Patient Admissions: With the easing of restrictions, hospital companies are witnessing a surge in admissions. For instance, HCA Healthcare, Inc., Tenet Healthcare and Universal Health Services witnessed volume recovery in June. Each company reported a rebound in volumes to the pre-pandemic levels in the month while some regions were seeing higher volume growth than the pre-pandemic levels. At the outset of the coronavirus outbreak, hospital companies bore the brunt of halting their elective procedures surgeries (which generate revenues and profits for hospitals) to accommodate the COVID-19-infected patients at the direction of the federal and state governments. Additionally, emergency room visits declined significantly because of general concerns over the pandemic and the enforcement of shelter-at-home policies. Though the patient inflow is improving gradually, the pace of the industry’s overall turnaround will be crucial in influencing its participants’ top-line performances.

Federal Dollars Propping Up Companies: The bipartisan CARES Act and the Paycheck Protection Program and Health Care Enhancement Act provided $175 billion as relief funds to the hospitals and other healthcare providers who have been the front-line coronavirus warriors. The Department of Health and Human Services has been disbursing grants since April to hospitals and other health care providers in tranches. These funds are aimed at relieving hospitals from the loss incurred due to COVID-19 business disruption. Though it won’t be fair to say that these grants will be able to completely mitigate the financial suffering caused by the revenue loss to the hospital entities but again the extent of paincan certainly be reduced with the help of government aid. We note that the leading hospital companies, namely HCA Healthcare, Universal Health Services Inc., Tenet Healthcare and Community Health Systems reported significant declines in elective care all through March, April and May but each managed to stay profitable in the second quarter, courtesy of the government stimulus.

Cost-Control Measures to Boost Margins: Cost-saving measures are one of the ways that the hospital companies resorted to for aiding the margins since the top lines were already stressed. Players in the industry implemented cost-reduction initiatives, suspended share repurchases and stalled dividend programs, reduced planned projects and also lowered planned capital expenditures.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Medical-Hospital industry is housed within the broader Zacks Medical sector. It carries a Zacks Industry Rank #122, which places it in the top 49% of 251 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bullish 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 top 49% 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. 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 its 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 5.6% against the S&P 500’s rise of 15.8%. Meanwhile, the Zacks Medical sector has gained 14% in the same time frame.

One-Year Price Performance



Industry’s Current Valuation

On the basis of the trailing 12-month EV-to-EBITDA ratio, which is commonly used for valuing hospital stocks, the industry trades at 6.26X compared with the S&P 500’s 14.45X and the sector’s 10.3X.

EV/EBITDA TTM



EV/EBITDA TTM

 

Over the past five years, the industry has traded as high as 8.4X, as low as 5.27X and at a median of 7.58X as the chart below shows.

4 Hospital Stocks to Keep an Eye on

HCA Healthcare Inc.:  This currently Zacks Rank #2 (Buy) stock is a  hospital company providing  services via surgery centers, free standing emergency rooms, urgent care centers and physician clinics.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company’s focus on cost control, inorganic growth strategy and a solid balance sheet will continue supporting HCA Healthcare in the quarters ahead.

Its shares have surged 47% over the past six months. The Zacks Consensus Estimate for the current-year earnings has been revised 84.6% upward to $11.97 over the past 90 days. The same for 2021 has been revised 1.8% upward to $11.47 over the past 60 days. Earnings of the company surpassed estimates in three of the last four quarters (missed the mark in one), the average surprise being 63.51%.

Price & Consensus: HCA

Universal Health Services Inc.: This presently Zacks #2 Ranked player owns and operates (through its subsidiaries) acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers.
Higher admissions and patient days are steadily driving revenues. Acquisitions also played an instrumental role in building its growth trajectory by adding facilities, beds and hospitals to its business portfolio.

Its inorganic growth strategy  will help it expand its domestic and international presence. Its balance sheet strength with adequate solvency level is impressive too.

Its shares have rallied 19% over the past six months. The Zacks Consensus Estimate for the current-year earnings has moved 16.7% north to $9.41 over the past 60 days. The same for 2021 has been raised 2.5% to $10.44 over the past 60 days. The company’s bottom line surpassed estimates in two of the last four quarters (missed the mark on two occasions), the average surprise being 106.3%.

Price & Consensus: UHS

Tenet Healthcare Corp.: This  company owns and operates general hospitals and related health care facilities for urban and rural communities across numerous states

It has been undertaking strategic divestitures for a while to get rid of its non-core and unprofitable business units for repaying debt and maintaining financial liquidity. Its inorganic growth on the back of accretive acquisitions and alliances remain commendable. Such initiatives primarily boost the company’s scale of business and operating capacity, which poise it well for growth.

Its cost-management program, which primarily comprises headcount reductions and renegotiation of contracts with suppliers and vendors, is likely to benefit its earnings.

Its shares have jumped 84% over the past six months. The Zacks Consensus Estimate for the 2021 earnings has been revised 8% upward to $2.54 over the past 30 days. The stock currently carries a Zacks Rank #3 (Hold) and its earnings surpassed estimates in three of the last four quarters (missed the mark in one), the average surprise being 191.44%.

Price & Consensus: THC

Acadia Healthcare Company, Inc.: The company provides behavioral health care services in the United States and the United Kingdom.

Its top line has shown an improving trend over the years, driven by both organic and inorganic growth. It is well poised to fund new bed developments, given an impressive capital position. Its steady focus on acquisitions is expected to add scale to its business. It has been generating sufficient cash from operations over the years, which provides it with financial flexibility to pursue acquisitions and growth-driving projects.

Its shares have soared 84% over the past six months. The Zacks Consensus Estimate for the current-year earnings has been revised 2.9% upward to $2.11 over the past 30 days. The same for 2021 has been revised 0.8% upward to $2.47 over the past 30 days. The stock carries a Zacks Rank of 3 at present. Earnings of the company surpassed estimates in three of the last four quarters (lagged the consensus mark in one), the average surprise being 14.45%.

Price & Consensus: ACHC


 

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