5 Hospital Stocks to Watch Amid Improving Industry Trends
Cost optimization and technological innovation are aiding the Zacks Medical-Hospital industry players. Their margins are further propelled by easing staffing challenges. Improving market conditions as seniors are now undergoing delayed elective procedures are boosting patient days and occupancies, which, in turn, is aiding hospitals’ top line. However, growing competition in this market remains a common theme. Technological implementations are expected to offer companies a competitive edge with improved efficiency. Industry players like HCA Healthcare Inc. HCA, Universal Health Services Inc. UHS, Tenet Healthcare Corporation THC, Acadia Healthcare Company, Inc. ACHC and Community Health Systems, Inc. CYH are expected to benefit from these developments.
Industry Overview
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 Defining the Hospital Industry's Future
Cost Optimization: The rising patient volumes, prices of hospital supplies and inflationary pressures are likely to increase hospitals’ operating costs. The improvement in labor and staffing challenges will continue to provide them some breathing room. These companies are expected to increase labor productivity and implement new technologies to optimize expenses. Also, contract renegotiations with suppliers and vendors will provide an impetus.
Technological Advancements: The hospital players are embracing the digital age as technological innovations and wider adoption continue to support growth. This will optimize hospitals' services, minimize unnecessary costs, increase convenience and elevate the patient experience. The COVID-19 pandemic triggered the adoption of telehealth and telemedicine services, which are expected to continue on their growth path. The companies are leveraging artificial intelligence (AI) and automation, along with real-time analytics, to provide quality care. AI helps improve clinical workflow management and medical diagnosis, which will limit patients' waiting time and decrease their treatment costs.
Patient Volume Growth: Seniors are now undergoing deferred elective procedures as pandemic-related constraints are fast vanishing. Hence, pent-up demand for procedures like hip and knee surgeries is driving patient volumes. Although inflationary pressures and financial constraints can force some patients to delay addressing certain non-emergency medical needs, the benefits of the Affordable Care Act (ACA) and similar safety nets can help them navigate through tough times.
Rising Elderly Population: Advancements in science, nutrition and healthcare are expected to stimulate constant growth in the senior population. Over the long run, this will likely expand the demand for hospital services. The U.S. Census Bureau's revised report suggests that people above 65 years are projected to be one of the fastest-growing segments of the nation's population. According to Statista, the leading market and consumer data provider, the percentage of this segment is likely to reach 22% by 2050 from 16.9% witnessed in 2020. The change in demographics and the rising incidence of diseases are expected to be industry drivers. Also, more people signing up for healthcare plans through the ACA indicates fewer challenges to visiting hospitals in the future.
Zacks Industry Rank Indicates Rosy Outlook
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all 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 #46, which places it in the top 18% 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 two to one.
The industry’s positioning in the top 50% 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 the stocks that you may want to buy or 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 period, the stocks in this industry have gained 17.7% compared with the S&P 500’s rise of 14.5%. The Zacks Medical sector has declined 1.5% during this time.
One-Year Price Performance
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 8.67X compared with the S&P 500’s 13.29X and the sector’s 9.87X.
Over the past five years, the industry has traded as high as 9.55X and as low as 5.57X, with a median of 7.81X, as the charts below show.
EV/EBITDA Ratio (Past 5 Years)
5 Stocks Worth Your Attention
Below we have presented two stocks with a Zacks Rank #2 (Buy) and three stocks with a Zacks Rank #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. Its telemedicine business line is likely to continue increasing the top line. It is well-poised to grow on the back of expanding patient volumes and growing admissions. Its Managed Medicare and Medicaid operations are expected to benefit top-line growth. HCA’s inorganic growth strategy enables it to scale its business. It also focuses on boosting shareholders’ value with dividend hikes and repurchases.
The Zacks Consensus Estimate for the company’s 2023 EPS indicates 9.2% year-over-year growth. The consensus mark for 2023 revenues signals a 6% increase from a year ago. HCA Healthcare beat earnings estimates thrice in the past four quarters and missed once, the average surprise being 5.4%. It currently carries a Zacks Rank #2. Shares of the company have jumped 26.8% over the past year.
Price & Consensus: HCA
Tenet Healthcare Corporation: The company provides diversified healthcare services, primarily through general hospitals and related healthcare units. It is witnessing growth in Ambulatory Care and Hospital segments, thanks to rising patient volumes and emergency room visits. Its solid USPI performance is a major contributor to the Ambulatory Care unit. Continuous buyouts and tuck-in acquisitions are aiding the company. It also benefits from contractual rate increases in the Conifer unit.
The Zacks Consensus Estimate for THC’s 2023 bottom line is pegged at $5.73 per share, which improved 2.3% over the past 60 days. The consensus mark for 2023 revenues signals a 5.8% increase from the prior year. Tenet Healthcare beat earnings estimates in all the past four quarters, the average surprise being 25.9%. It currently has a Zacks Rank #2. Shares of the company have gained 23.2% over the past year.
Price & Consensus: THC
Universal Health Services: The company operates acute care facilities, and outpatient and behavioral health care units. It focuses on behavioral indications like autism, eating disorders, sexual trauma, and disorderliness in the military through its patriot support program. UHS has been gaining traction from higher patient days and an expansive care network. The rising number of licensed beds in acute care hospitals and joint ventures in the behavioral health portfolio is likely to aid its growth.
The Zacks Consensus Estimate for Universal Health’s 2023 bottom line indicates 4% year-over-year growth. The consensus mark for its 2023 revenues signals a 5.9% increase from a year ago. UHS beat earnings estimates in all the past four quarters, the average surprise being 4.7%. It currently has a Zacks Rank #3. Shares of the company have gained 32.6% in the past year.
Price & Consensus: UHS
Acadia Healthcare: ACHC provides behavioral healthcare services in the United States and Puerto Rico. Improving patient volumes, admissions and extension of its service lines into new states are aiding the company’s performance. It is on track to add 300 beds to its existing facilities this year and inaugurate six comprehensive treatment centers. However, rising expenses are keeping its margins under check while high debt remains concerning. Though shares of ACHC have declined 14.8% in the past year, its strong operations are likely to help shares bounce back in the days ahead.
The Zacks Consensus Estimate for ACHC’s 2023 bottom line indicates 12.6% year-over-year growth. The consensus mark for 2023 revenues signals a 10.4% increase from a year ago. ACHC beat on earnings twice in the last four quarters, met the mark once and missed on the other occasion, the average surprise being 2.8%.
Price & Consensus: ACHC
Community Health Systems: It is a leading operator of general acute care hospitals and outpatient facilities in communities across the United States. Rising patient volumes, admissions and improved occupancy rates are boosting the company’s results. Its focus on telehealth is expected to position the company for long-term growth. Community Health also does not shy away from divesting non-core assets to boost profitability, same-store metrics and cash flow.
The Zacks Consensus Estimate for CYH’s 2023 bottom line indicates a 55.1% improvement from a year ago. The consensus mark for its 2023 revenues signals 1.7% growth from the prior year. Community Health has witnessed three upward estimate revisions over the past 60 days against two in the opposite direction. It currently has a Zacks Rank #3. Shares of the company have gained 11.1% in the past year.
Price & Consensus: CYH
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HCA Healthcare, Inc. (HCA) : Free Stock Analysis Report
Universal Health Services, Inc. (UHS) : Free Stock Analysis Report
Tenet Healthcare Corporation (THC) : Free Stock Analysis Report
Community Health Systems, Inc. (CYH) : Free Stock Analysis Report
Acadia Healthcare Company, Inc. (ACHC) : Free Stock Analysis Report
