After facing multiple issues for several quarters, hospital companies are witnessing improving market conditions thanks to the easing staffing challenges and increasing non-Covid utilization. As serious medical conditions continue to rise, outpatient surgeries and patient days are likely to increase, boosting Zacks Medical-Hospital industry players’ revenues. However, growing competition in this market remains a common theme. Technological innovations and adoptions are expected to provide companies with a competitive edge and improve efficiency. Leading industry players like HCA Healthcare Inc. HCA, Universal Health Services Inc. UHS, Acadia Healthcare Company, Inc. ACHC and Tenet Healthcare Corporation THC should benefit from these developments.
About the Industry
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 to Watch in the Hospital Industry
Rising Patient Volumes: With declining COVID-related utilization of resources, non-COVID admissions are expected to grow. As serious medical conditions are rising, demand for elective procedures is likely to drive patient volumes. Growth in admissions, outpatient surgeries and Medicare reimbursements, and deferred procedures can support hospital companies' revenues. However, inflationary pressures and financial constraints can force patients to delay addressing some non-emergency medical needs. The benefits of the Affordable Care Act and similar safety nets can provide patients with some respite, which can help them navigate tough times.
Growing Elderly Population: Steady advancements in science, nutrition and healthcare enable the senior population to witness constant growth. This can result in rising demand for hospital services in the long term. The U.S. Census Bureau’s revised report suggests that individuals above 65 years are projected to be one of the fastest-growing segments of the country’s population, reflecting a climb from 17% in 2020 to 21% in 2030. By 2034, older adults are expected to outnumber children, a first in the country’s history. This demographic change and the rising incidence of diseases will likely be industry drivers. Plus, the increasing number of people signing up for healthcare plans through the Affordable Care Act indicates fewer challenges to visiting hospitals in the future.
Technological Advancements: Technological improvements, innovations and wider adoption will continue to support hospital players. This should optimize hospital services, minimize unnecessary expenses and elevate the patient experience. The COVID-19 pandemic triggered the adoption of telehealth and telemedicine services, which will likely rise in the future. The companies are leveraging AI and automation along with real-time analytics to provide quality care. AI helps improve clinical workflow management and medical diagnosis that hospitals utilize. The industry players are using the virtual health domain to enhance efficiency by limiting the patients’ waiting time and reducing their treatment costs.
Rising Expenses: With rising patient volumes, operating costs are bound to go up. Increasing costs of hospital supplies due to inflation will likely reduce margins. Also, growth-project investments will keep expenses elevated, putting pressure on the bottom line. However, improving labor shortages and staffing challenges will provide hospital companies some breathing room. Moreover, renegotiating contracts with suppliers and vendors will provide an impetus.
Zacks Industry Rank Depicts Promising Scenario
The group’s Zacks Industry Rank, which is basically 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 #103, which places it in the top 41% 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 2 to 1.
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 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 time period, the stocks in this industry have declined 4.2% compared with the S&P 500’s fall of 7.1% and the Zacks Medical sector’s decrease of 15.2%.
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 8.90X compared with the S&P 500’s 12.55X and the sector’s 8.14X.
Over the past five years, the industry has traded as high as 9.05X, as low as 5.57X and at a median of 7.80X, as the charts below show.
EV/EBITDA Ratio (Past 5 Years)
4 Stocks Worth Your Attention
We are presenting four stocks with a Zacks Ranks #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 inorganic growth strategies enable it to persistently expand its network across several markets, increase patient volumes and add more hospitals to its portfolio. Its telemedicine business line is expected to continue benefiting operations. HCA Healthcare also focuses on boosting shareholders’ value with dividend hikes and buybacks.
The Zacks Consensus Estimate for HCA Healthcare’s 2023 EPS indicates 1.7% year-over-year growth. The consensus mark for its revenues in 2023 signals a 3.9% increase from a year ago. HCA beat earnings estimates twice in the past four quarters and missed on two occasions, the average surprise being 2.3%. Shares of the company have jumped 9.7% in the past month.
Price & Consensus: HCA
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. This segment holds immense scope for growth in the days ahead, considering the dire need to address behavioral health issues. UHS’ plans to add new capacities in hospitals in important markets of Texas and California to address strong acute care demand are expected to be major tailwinds. It has a strong share buyback plan in place to boost shareholder value.
The Zacks Consensus Estimate for Universal Health’s 2023 bottom line indicates 1.7% year-over-year growth. The consensus mark for its revenues in 2023 signals a 5.2% increase from a year ago. UHS beat earnings estimates thrice in the past four quarters and missed on one occasion, the average surprise being 0.2%. Shares of the company have risen 11% in the past month.
Price & Consensus: UHS
Acadia Healthcare: ACHC provides behavioral healthcare services in the United States and Puerto Rico. It has been emphasizing on buyouts and new additions for robust growth. Acquisitions added facilities, beds and hospitals to Acadia Healthcare’s network and contributed to its top line. It is also actively pursuing joint ventures with renowned healthcare systems, which is helping it expand its capabilities through bed additions. The company plans to add roughly 300 beds through facility expansions and open a minimum of six CTCs in 2023. Its moves to streamline its portfolio boost operating efficiency and profitability.
The Zacks Consensus Estimate for ACHC’s 2023 bottom line indicates 9.6% year-over-year growth. The consensus mark for its revenues in 2023 signals a 9.6% increase from a year ago. ACHC beat on earnings twice in the last four quarters, met the mark once and missed estimates on another occasion, the average surprise being 2.5%. Shares of ACHC have gained 7.2% in the past month.
Price & Consensus: ACHC
Tenet Healthcare Corporation: The company, with its subsidiaries, provides healthcare services, primarily through general hospitals and related healthcare units. THC has made several acquisitions, and formed strategic partnerships and alliances to augment the scale of business, operating capacity and geographical presence. Tenet Healthcare’s performance has been aided by USPI Holding Company’s (Ambulatory Care) operations.
The Zacks Consensus Estimate for THC’s 2023 bottom line is pegged at $5.15 per share, which remained stable over the past month. The consensus mark for its revenues in 2023 signals a 3.7% increase from the prior year. Tenet Healthcare beat earnings estimates in each of the past four quarters, the average surprise being 65.2%. Shares of the company have risen 18.2% in the past month.
Price & Consensus: THC
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