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Near-Term Outlook for Medical Services Industry Looks Bright

Urmimala Biswas
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Near-Term Outlook for Medical Services Industry Looks Bright

The Zacks Medical Services industry essentially comprises third-party service providers and care givers that are 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 and improving quality of medical care or 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 themes in the industry:

  • Volume to value-based care: Over the past few years, the healthcare industry is 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 production house and third-party caregivers under one roof to gain competitive advantage.

  • Reduced regulatory and tax burdens create 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 sorter recovery times. Accordingly, terms like ‘bed less hospitals’ have become trend of the future. Third-party laboratory testing providers and contract research organizations are also experiencing increasing demand, thanks to the growing need for complex tests, services and clinical research.

  • Boom time for workforce solution supply market: With rising cognizance about the benefits of specialized medical caregiving, the need for healthcare workforce/ staffing service providers has been increasing 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 job openings for nurses through 2020.  

Zacks Industry Rank Indicates Bright Prospects

The Zacks Medical Services industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #60, which places it in the top 23% 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.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current fiscal year have increased 2.3%.

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 Outperforms S&P 500 and Sector 

The Medical Services Industry has outperformed the S&P 500 as well as its own sector over the past year. The stocks in this industry have collectively gained 27.3% in the past year while the Medical Sector has rallied 19.7% and the Zacks S&P 500 composite has increased 3.6%.

Industry’s Current Valuation

On the basis of forward 12-month Price-to-earnings (P/E) ratio, which is commonly used for valuing medical stocks, the industry is currently trading at 13.94X compared with the S&P 500’s 15.78X and the sector’s 16.37X.

Over the last five years, the industry has traded as high as 19.24X, as low as 11.01X, and at the median of 14.50X, 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 rising number of healthcare application and services that can 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 the 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 the unfavorable economic conditions, many of them are currently unable 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.

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.

The company has a Zacks Rank #1. The Zacks Consensus Estimate for fiscal 2018 earnings indicates year-over-year growth of 105.6%. The company delivered an average positive earnings surprise of 15.7% in the trailing four quarters.

BioTelemetry, Inc. (BEAT): This is a mobile and wireless medical technology company, providing cardiac and mobile blood glucose monitoring (BGM), centralized medical imaging, and original equipment manufacturing services for the healthcare and clinical research industries.

The company has a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2018 earnings indicates year-over-year growth of 55.7%. The company delivered an average positive earnings surprise of 30.9% in the trailing four quarters.

PRA Health Sciences, Inc. (PRAH): Headquartered in Raleigh, NC, PRA Health Sciences (PRAH) is a renowned global Contract Research Organization (CRO). The company provides outsourced clinical development services to biotechnology and pharmaceutical industries.

The company has a Zacks Rank #2. The Zacks Consensus Estimate for 2018 earnings indicates year-over-year growth of 25.8%. The company has an estimated long-term earnings growth rate of 17.5%. The company delivered an average positive earnings surprise of 4.5% for the trailing four quarters.

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