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Nursing Industry Outlook Buoyant on Increasing Life Expectancy

Sapna Bagaria

Companies in the Zacks Medical-Nursing Home industry provide long-term skilled nursing care and social services. The industry includes skilled nursing facilities for recovery from acute or chronic medical conditions, mental health and substance abuse facilities, and various types of independent living, community care and assisted-living arrangements.

Nursing homes typically care for patients recovering from major medical procedures and older patients with chronic disabilities, and deteriorating mental and physical capacities. A wide array of healthcare and dependent-care services are provided, including 24-hour nursing care, physical therapy, help with activities of daily living — such as bathing, eating and dressing, housekeeping, food service, personal services, and leisure activities.

Here are the industry’s three major themes:

Changing Demography to Drive Demand: As a result of scientific and medical breakthrough over the past three decades, life expectancy has increased in the United States. Seniors now account for a higher percentage of the country’s total population thus driving the overall demand for healthcare services. At present, the primary market demographic for skilled nursing services is primarily individuals aged 75 and older. According to the 2018 U.S. Census, between 2010 and 2030, the number of individuals aged 65+ is projected to nearly double from 39 million to 73 million, a growth rate nearly 5 times faster than the 17% increase expected for the total population.

Shift of Patient Care to Lower-Cost Alternatives: The growth of the senior population in the United States continues to increase healthcare costs, often faster than the available funding from government-sponsored healthcare programs. In response, federal and state governments have adopted cost-containment measures that encourage the treatment of patients in more cost-effective settings such as skilled nursing facilities, for which the staffing requirements and associated costs are often significantly lower than acute care hospitals, and other post-acute care settings. As a result, skilled nursing facilities are generally serving a larger population of higher-acuity patients than in the past, thus driving demand in the industry.

Consolidation in Industry: The senior living industry has undergone dramatic growth in the last two decades, marked by the emergence of assisted-living communities in the mid-1990s, and it remains highly fragmented with numerous local and regional operators. According to NIC data, there were more than 2300 local and regional senior housing operators as of Dec 31, 2018, of which more than 90% operated five or fewer communities. In a bid to achieve economies of scale, grow in size, gain an upper hand in bargaining with insurance companies, carriers are now resorting to mergers and acquisitions.

Zacks Industry Rank Indicates Bright Prospects

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. The Zacks Medical-Nursing Home industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #11, which places it at the top 4% of 255 Zacks industries. 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.

Before we present a few nursing home stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms S&P 500 But Fares Better Than Its Sector

The Zacks Medical-Nursing Home industry has underperformed the Zacks S&P 500 composite but has fared better than its own sector over the past year. The stocks in this industry have collectively lost 6.6% in the past year and the Medical sector has declined 13.3%. Meanwhile, the Zacks S&P 500 composite has gained 4.7%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month Enterprise Value to EBITDA (EV/EBITDA) ratio, which is commonly used for valuing nursing home stocks, the industry is currently trading at 16.3X compared with the S&P 500’s 11.1X and the sector’s 9.1X.

Over the past five years, the industry has traded as high as 17.4X, as low as 4.1X and at the median of 5.7X.

EV/EBITDA (TTM)


EV/EBITDA (TTM)


Bottom Line

Investment by companies in medical technology and upgrade of systems and procedures to provide efficient services will keep costs high. Reimbursement pressure from government and consolidation in the health insurance space will result in stiff competitive conditions.

Shortage of skilled nursing facilities and high wages will continue to weigh on margins. Nevertheless, the changing demography of the United Sates with increasing senior population will continue to drive demand for nursing home services.

Stocks to Consider

Investors may consider buying the following stocks that carry a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Capital Senior Living Corp. (CSU) is one of the largest providers of senior living services in the United States.

The stock has declined 49% in a year’s time. The company has surpassed estimates in three of the last four quarters, with an average positive surprise of 17.16%.

Price and Consensus: CSU

Brookdale Senior Living Inc. (BKD) is a leading owner and operator of senior living facilities throughout the United States.

The stock has declined 2.1% in a year’s time. The company has surpassed estimates in three of the trailing four quarters, with an average positive surprise of 18.49%.

Price and Consensus: BKD

Genesis Healthcare, Inc. (GEN) provides long-term care, assisted/senior living and rehabilitation therapy.

The stock has lost 9.7% in a year’s time. The company has an estimated earnings growth rate of 10% for 2019 compared with the industry’s growth rate of 10.5%.

Price and Consensus: GEN

The Ensign Group, Inc. (ENSG) provides a broad spectrum of skilled nursing and assisted living services, physical, occupational and speech therapies, home health and hospice services and other rehabilitative and health care services at health care facilities, hospice agencies, home health agencies and home care businesses.

The stock has gained 3.6% in a year’s time. The company has surpassed estimates in three of the four reported quarters with an average positive surprise of 3.77%.

Price and Consensus:  ENSG


 

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Genesis Healthcare, Inc. (GEN) : Free Stock Analysis Report
 
The Ensign Group, Inc. (ENSG) : Free Stock Analysis Report
 
Capital Senior Living Corporation (CSU) : Free Stock Analysis Report
 
Brookdale Senior Living Inc. (BKD) : Free Stock Analysis Report
 
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