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Near-Term Outlook for Medical Services Industry Looks Bright

Urmimala Biswas

The Zacks Medical Services industry comprises third-party service providers and caregivers appointed by core healthcare companies for economies of scale. With growing importance of efficient healthcare management, the industry, which focuses particularly on handling medical costs, improving quality of medical care and increasing administrative efficiencies, has become an integral part of health care.

The industry includes pharmacy benefit managers, contract research organizations, mobile and wireless medical technology companies, third-party testing labs, surgical facility providers and healthcare workforce solutions providers among others.

Here are the three major industry themes:

Workforce Solution Supply Market in Focus: With rising cognizance about the benefits of specialized medical caregiving, the need for healthcare workforce/staffing service providers has increased significantly. For example, the demand for nurses has increased manifold and is expected to remain high. Going by a study published by Georgetown University, the economy will create 1.6 million openings for nurses through 2020.

Volume to Value-based Care: Over the past few years, the healthcare industry has been strategically moving from volume to value-based care. This changing pattern of care calls for efficient and better-quality facilities, thus gradually increasing the need to appoint specialized external service providers. Currently, a lot of public and private health organizations are keeping their core group of caregivers and third-party caregivers under one roof to gain competitive advantage.

Reduced Regulatory and Tax Burden Offers Scope: With a significant reduction in regulatory and tax burden on U.S. healthcare companies, the space is finally making progress in terms of technology adoption. This is creating opportunities for mobile and wireless medical technology companies. This apart, thanks to the specialized skills and advanced techniques of surgical facility providers, treatments are becoming less invasive with shorter recovery times. Accordingly, things like ‘bedless hospitals’ are expected to be the future of healthcare. Third-party laboratory testing providers and contract research organizations are also experiencing increasing demand, thanks to growing need for complex tests, services and clinical research.

Zacks Industry Rank Indicates Encouraging Prospects

The Zacks Medical Services industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #83, which places it in the top 33% 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 bright 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.

We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Underperforms Sector and S&P 500

The Medical Services Industry has underperformed the S&P 500 as well as its own sector over the past year. The industry has declined 21.2% in the said time frame compared with the Medical sector’s 4.1% decline. Meanwhile, the Zacks S&P 500 composite witnessed a rise of 6.8%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing medical stocks, the industry is currently trading at 31.78X compared with the S&P 500’s 17.17X and the sector’s 19.97X.

Over the last five years, the industry has traded as high as 45.17X, as low as 25.74X, and at the median of 31.78X, as the charts below show.

Price-to-Earnings Forward Twelve Months (F12M)

 

Price-to-Earnings Forward Twelve Months (F12M)

Bottom Line

Over the past five years, the third-party medical services industry has expanded rapidly, creating huge scope for companies within this niche as well as for those in the broader healthcare value chain. This industry is gaining prominence on a rising number of healthcare applications and services that help core healthcare companies run their operations in an optimal way. Going by a 2018 McKinsey report, this industry is currently working to address half a trillion dollars of annual medical spending resulting from low productivity and waste.

On the flip side, third-party medical service providers are currently facing issues related to a tough capital spending environment. This has lengthened core healthcare companies’ decision process related to investment and purchases of services. Also, smaller biotechnology companies that are customers of these medical services companies depend on the credit and capital markets. With unfavorable economic conditions, many of them are not being able to properly access credit or equity funding. This is gradually reducing demand for third-party service providers.

Below are three stocks within the Medical Services industry that have been witnessing positive earnings estimate revisions and carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare Services, Inc. (AMN): The company is a prominent name in the field of healthcare workforce solutions and staffing services to healthcare facilities in the nation. It delivers managed services programs, healthcare executive search solutions, vendor management systems, recruitment process outsourcing, predictive labor analytics, mid-revenue cycle management, credentialing solutions and other services.

Price and Consensus: AMN

The company has a Zacks Rank #1. It has an impressive long-term growth rate of 38.1%. The Zacks Consensus Estimate for fiscal 2019 sales indicates year-over-year growth of 3.3%. The company delivered average positive earnings surprise of 6.03% in the trailing four quarters.

HealthEquity, Inc. (HQY): The company provides various solutions for managing health care accounts, health reimbursement arrangements, and flexible spending accounts for health plans, insurance companies and third-party administrators.

Price and Consensus: HQY

The company has a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2019 earnings indicates year-over-year growth of 11.76%. The company delivered average positive earnings surprise of 19.19% in the trailing four quarters.

Medpace Holdings, Inc. (MEDP): This is a scientifically-driven, global, full-service clinical contract research organization, providing Phase I-IV clinical development services to biotechnology, pharmaceutical and medical device industries.

Price and Consensus: MEDP

The company has a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2019 earnings indicates year-over-year growth of 1.93%. The company delivered average positive earnings surprise of 17.10% in the trailing four quarters.

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