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2 Top Hospital Stocks to Buy Despite Industry Headwinds
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The hospital operators are currently grappling with surplus supply, stiff competition, labor shortage and escalating operating expenses. Customers are deferring non-emergency medical needs due to financial stress, which in turn, is putting a lid on the Zacks Medical-Hospital industry players’ growth potential. However, resumption of non-urgent care procedures stimulated a recovery in patient volumes. The rise in outpatient surgeries and patient days is benefiting the hospital industry. Improvement in technology and utilization of telehealth services are helping hospital companies optimize utility while lowering treatment costs. Leading industry players like Acadia Healthcare Company, Inc. (ACHC - Free Report) and Pediatrix Medical Group, Inc. (MD - Free Report) are set to 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, among others. Revenues of these companies depend on inpatient occupancy levels, the 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 Trends Defining the Hospital Industry's Future
Rising Costs: Due to increasing supplies expense, high salaries, wages and benefits, and other operating expenses, hospital companies are witnessing a decline in the bottom line. The ongoing labor shortage created further headaches for the industry players. Investments in growth projects will keep the costs ballooning, at least in the short term. These escalating expenses can put further pressure on the margins. This might trigger renegotiation of contracts with suppliers and vendors, as witnessed in Tenet Healthcare Corporation’s (THC - Free Report) case.
Recovering Volumes: Thanks to the declining intensity of COVID-related headwinds, hospital companies are witnessing higher patient volumes and demand for elective procedures. The uptick in admissions, outpatient surgeries and other procedures will boost these companies' results. The rising patient volumes are supported by the success of vaccination among the majority of the population. Higher patient days, emergency department volumes and deferred procedures will somewhat boost the hospital companies’ revenues. However, patients delaying non-emergency medical needs due to financial constraints, as found in a survey by Discover Financial Services (DFS - Free Report) , can be a major headwind. Per Discover Financial, 31% of Americans with medical debt are holding back from undergoing treatments recommended by the doctors.
Aging Population Growth: Demand for hospital services will continue to rise in the long term as the percentage of senior people in the total U.S. population is expected to increase. Per the U.S. Census Bureau’s revised report that covered census between 2020 and 2030, individuals aged above 65 years are projected to be one of the fastest-growing segments of the U.S. population, reflecting a climb from 17% to 21%. Due to the continuous advancements in science, nutrition and healthcare, the senior population is likely to witness constant growth as the segment expected to live longer. This demographic change and the rising incidence of diseases will be an industry driver.
Telehealth & Technology: The pandemic fueled the adoption of telehealth facilities in 2020 and 2021. The year 2022 is expected to see further improvement of technologies and innovations, which will support the uptake of telehealth and telemedicine services. The industry players are leveraging AI and automation along with real-time analytics to provide quality care. AI helps improve clinical workflow management and medical diagnosis that are aiding hospital companies. The companies are utilizing the virtual health domain to heighten their efficiency by limiting the patients’ waiting time and trimming their treatment costs. This should optimize hospital services, minimize unnecessary costs and enhance patient experience.
Zacks Industry Rank Indicates Bearish Outlook
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates dull near-term prospects. The Zacks Medical-Hospital industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #202, which places it at the bottom 19% of nearly 250 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. The industry’s earnings estimates for 2022 have decreased 7% in the past year. Given the lackluster near-term prospects, companies in the space are expected to take a hit.
Before we present a couple of stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and the valuation picture.
Industry Underperforms S&P 500 & Sector
The Zacks Medical-Hospital industry has underperformed the Zacks S&P 500 composite as well as its sector in the past year.
During this time period, the stocks in this industry have declined 26.8% compared with the S&P 500’s fall of 12.2% and the Zacks Medical sector’s decrease of 18%.
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 6.63X compared with the S&P 500’s 12.31X and the sector’s 7.76X.
Over the past five years, the industry has traded as high as 8.58X, as low as 5.31X and at a median of 7.60X as the chart below shows.
Acadia Healthcare: ACHC provides behavioral health care services in the United States and Puerto Rico. Acadia Healthcare has been emphasizing on acquisitions for expedited growth. Buyouts added facilities, beds and hospitals to ACHC’s network and contributed to its top line. ACHC is also actively pursuing JVs with renowned healthcare systems, which is helping it expand its capabilities through bed additions. The year 2022 is likely to be its strongest year with respect to JVs as four or five facilities are expected to commence operations. The currently Zacks Rank #2 player’s moves to streamline its portfolio to boost efficiency and profitability are also praiseworthy.
Acadia Healthcare expects current-year revenues in the band of $2.55-$2.60 billion, indicating an increase from the 2021 level of $2.3 billion. Adjusted EBITDA is projected to be $575-$610 million, implying an increase from $558.7 million in 2021. Adjusted earnings per share are forecast within $2.85-$3.15, calling for a rise from the 2021 level of $2.56. ACHC beat on earnings twice in the last four quarters, met the mark once and missed estimates on another occasion, the average surprise being 4.4%. Shares of ACHC have jumped 7% in the past month.
Price & Consensus: ACHC
Pediatrix Medical: Operational excellence, inorganic growth via strategic acquisitions and a strong segmental performance are boosting Pediatrix Medical’s performance. It is expanding telehealth services to ensure access to healthcare even when patients stay at home. Given the current situation and easy access, we expect this business line to generate high profits. MD is expected to boost its services across maternal-fetal medicine, neonatology and obstetrics, and 18 pediatric subspecialty offerings. Rising patient volumes will boost MD’s profit levels in the coming days.
MD expects revenues of $2 billion in 2022, indicating a 4.7% increase from the 2021 reported figure. It anticipates adjusted EBITDA at a minimum of $270 million, suggesting 1.7% growth from the 2021 figure. Pediatrix Medical beat on earnings in each of the last four quarters, the average being 18.5%. Shares of MD have rallied 17.1% in the past month. MD currently sports a Zacks Rank #1.
Price & Consensus: MD
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2 Top Hospital Stocks to Buy Despite Industry Headwinds
The hospital operators are currently grappling with surplus supply, stiff competition, labor shortage and escalating operating expenses. Customers are deferring non-emergency medical needs due to financial stress, which in turn, is putting a lid on the Zacks Medical-Hospital industry players’ growth potential. However, resumption of non-urgent care procedures stimulated a recovery in patient volumes. The rise in outpatient surgeries and patient days is benefiting the hospital industry. Improvement in technology and utilization of telehealth services are helping hospital companies optimize utility while lowering treatment costs. Leading industry players like Acadia Healthcare Company, Inc. (ACHC - Free Report) and Pediatrix Medical Group, Inc. (MD - Free Report) are set to 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, among others. Revenues of these companies depend on inpatient occupancy levels, the 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 Trends Defining the Hospital Industry's Future
Rising Costs: Due to increasing supplies expense, high salaries, wages and benefits, and other operating expenses, hospital companies are witnessing a decline in the bottom line. The ongoing labor shortage created further headaches for the industry players. Investments in growth projects will keep the costs ballooning, at least in the short term. These escalating expenses can put further pressure on the margins. This might trigger renegotiation of contracts with suppliers and vendors, as witnessed in Tenet Healthcare Corporation’s (THC - Free Report) case.
Recovering Volumes: Thanks to the declining intensity of COVID-related headwinds, hospital companies are witnessing higher patient volumes and demand for elective procedures. The uptick in admissions, outpatient surgeries and other procedures will boost these companies' results. The rising patient volumes are supported by the success of vaccination among the majority of the population. Higher patient days, emergency department volumes and deferred procedures will somewhat boost the hospital companies’ revenues. However, patients delaying non-emergency medical needs due to financial constraints, as found in a survey by Discover Financial Services (DFS - Free Report) , can be a major headwind. Per Discover Financial, 31% of Americans with medical debt are holding back from undergoing treatments recommended by the doctors.
Aging Population Growth: Demand for hospital services will continue to rise in the long term as the percentage of senior people in the total U.S. population is expected to increase. Per the U.S. Census Bureau’s revised report that covered census between 2020 and 2030, individuals aged above 65 years are projected to be one of the fastest-growing segments of the U.S. population, reflecting a climb from 17% to 21%. Due to the continuous advancements in science, nutrition and healthcare, the senior population is likely to witness constant growth as the segment expected to live longer. This demographic change and the rising incidence of diseases will be an industry driver.
Telehealth & Technology: The pandemic fueled the adoption of telehealth facilities in 2020 and 2021. The year 2022 is expected to see further improvement of technologies and innovations, which will support the uptake of telehealth and telemedicine services. The industry players are leveraging AI and automation along with real-time analytics to provide quality care. AI helps improve clinical workflow management and medical diagnosis that are aiding hospital companies. The companies are utilizing the virtual health domain to heighten their efficiency by limiting the patients’ waiting time and trimming their treatment costs. This should optimize hospital services, minimize unnecessary costs and enhance patient experience.
Zacks Industry Rank Indicates Bearish Outlook
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates dull near-term prospects. The Zacks Medical-Hospital industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #202, which places it at the bottom 19% of nearly 250 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. The industry’s earnings estimates for 2022 have decreased 7% in the past year. Given the lackluster near-term prospects, companies in the space are expected to take a hit.
Before we present a couple of stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and the valuation picture.
Industry Underperforms S&P 500 & Sector
The Zacks Medical-Hospital industry has underperformed the Zacks S&P 500 composite as well as its sector in the past year.
During this time period, the stocks in this industry have declined 26.8% compared with the S&P 500’s fall of 12.2% and the Zacks Medical sector’s decrease of 18%.
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 6.63X compared with the S&P 500’s 12.31X and the sector’s 7.76X.
Over the past five years, the industry has traded as high as 8.58X, as low as 5.31X and at a median of 7.60X as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
2 Stocks to Buy
We are presenting two stocks with a Zacks Ranks #1 (Strong Buy) and 2 (Buy) from the Medical-Hospital industry. You can see the complete list of today’s Zacks #1 Rank stocks here.
Acadia Healthcare: ACHC provides behavioral health care services in the United States and Puerto Rico. Acadia Healthcare has been emphasizing on acquisitions for expedited growth. Buyouts added facilities, beds and hospitals to ACHC’s network and contributed to its top line. ACHC is also actively pursuing JVs with renowned healthcare systems, which is helping it expand its capabilities through bed additions. The year 2022 is likely to be its strongest year with respect to JVs as four or five facilities are expected to commence operations. The currently Zacks Rank #2 player’s moves to streamline its portfolio to boost efficiency and profitability are also praiseworthy.
Acadia Healthcare expects current-year revenues in the band of $2.55-$2.60 billion, indicating an increase from the 2021 level of $2.3 billion. Adjusted EBITDA is projected to be $575-$610 million, implying an increase from $558.7 million in 2021. Adjusted earnings per share are forecast within $2.85-$3.15, calling for a rise from the 2021 level of $2.56. ACHC beat on earnings twice in the last four quarters, met the mark once and missed estimates on another occasion, the average surprise being 4.4%. Shares of ACHC have jumped 7% in the past month.
Price & Consensus: ACHC
Pediatrix Medical: Operational excellence, inorganic growth via strategic acquisitions and a strong segmental performance are boosting Pediatrix Medical’s performance. It is expanding telehealth services to ensure access to healthcare even when patients stay at home. Given the current situation and easy access, we expect this business line to generate high profits. MD is expected to boost its services across maternal-fetal medicine, neonatology and obstetrics, and 18 pediatric subspecialty offerings. Rising patient volumes will boost MD’s profit levels in the coming days.
MD expects revenues of $2 billion in 2022, indicating a 4.7% increase from the 2021 reported figure. It anticipates adjusted EBITDA at a minimum of $270 million, suggesting 1.7% growth from the 2021 figure. Pediatrix Medical beat on earnings in each of the last four quarters, the average being 18.5%. Shares of MD have rallied 17.1% in the past month. MD currently sports a Zacks Rank #1.
Price & Consensus: MD