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5 Hospital Stocks Poised to Benefit From Strong Industry Growth
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The Zacks Medical-Hospital industry is facing several bullish trends like rising admissions, resumption of elective procedures, cybersecurity and other technological advancements. While increasing salaries and moderate staffing challenges may pose some obstacles, these will likely be largely offset by higher revenue per admission. Mergers and acquisitions (M&A) related activities are also seeing a strong resurgence in the hospital industry.
Industry players are increasingly focusing on capacity expansions to capture a larger market share in a fragmented industry. Companies like HCA Healthcare, Inc. (HCA - Free Report) , Universal Health Services, Inc. (UHS - Free Report) , Tenet Healthcare Corporation (THC - Free Report) , Acadia Healthcare Company, Inc. (ACHC - Free Report) and Community Health Systems, Inc. (CYH - Free Report) are likely to capitalize on these trends.
Industry Overview
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 Shaping the Industry
Growing Patient Volumes: The return of elective procedures post-pandemic has driven up patient volumes and admissions. According to the U.S. Census Bureau's revised report, the aging U.S. population, particularly the 65+ age group, is expected to fuel demand for hospital services, with this demographic projected to grow from 17.3% in 2022 to 22.8% by 2050. While concerns about medical inflation and rising costs persist, the Affordable Care Act and similar safety nets may help sustain patient volume growth. Outpatient care will likely be one of the fastest-growing businesses in the coming days.
Tackling Expense Growth: Higher patient volumes and utilization, combined with rising costs for supplies, labor, and benefits, are driving up hospital operating expenses. Despite some progress, staffing remains a challenge. To address these issues, hospitals are focusing on improving labor productivity, adopting new technologies to optimize costs, and boosting efficiency. Increased revenue per admission will help maintain margins while renegotiating supplier contracts will enhance cost management and operational efficiency.
Adapting to the Digital Age: The ransomware attack on UnitedHealth Group's Change Healthcare unit in February 2024 underscores the vital need for ongoing technological and cybersecurity advancements in healthcare. Hospital companies are increasingly leveraging AI, automation, and real-time analytics to enhance patient care, streamline workflows and reduce costs. These technologies boost operational efficiency and patient outcomes while maintaining a competitive edge. Additionally, the rise of telehealth and telemedicine, accelerated by the pandemic, continues to expand, cementing its role in modern healthcare delivery.
Revival of M&A Activity: Following a significant decline during the pandemic, M&A activity in the hospital and healthcare sector is rebounding. The industry, known for its fragmentation, is poised for a surge in M&A deals and partnership agreements in the coming quarters, which are expected to support capacity expansion efforts. According to a Deloitte report, 86% of health system executives expect M&A to be a key component of their 2024 strategic plans. Business consolidation, new technology partnerships and evolving business models are projected to substantially boost profitability for hospital operators.
Zacks Industry Rank Indicates Bullish Trends
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, signals bright near-term prospects. The Zacks Medical-Hospital industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #3, which places it in the top 1% 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 two to one.
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. As a matter of fact, the industry’s earnings estimates for 2024 have jumped 13.7% in the past year.
Before we present the stocks that you may want to monitor, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Medical-Hospital industry has fared better than its broader sector and the Zacks S&P 500 composite over the past year. During this period, the stocks in this industry have gained 40% compared with the Zacks Medical sector’s 8.4% growth. The S&P 500 index increased 26.2% during this time.
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 8.91X compared with the S&P 500’s 18.62X and the sector’s 13.97X.
Over the past five years, the industry has traded as high as 9.55X and as low as 5.57X, with a median of 7.87X, as the charts below show.
EV/EBITDA Ratio (Past 5 Years)
5 Stocks Worth Your Attention
Universal Health Services: The company operates acute care facilities, outpatient centers and behavioral health care units. It specializes in areas like autism, eating disorders, substance use disorders and military-related issues through its Patriot Support Program. It is seeing growth driven by an increase in patient days and a broadening care network. The expansion of licensed beds in acute care hospitals and strategic joint ventures in behavioral health are likely to further propel the company's growth.
The Zacks Consensus Estimate for Universal Health’s 2024 bottom line indicates 51% year-over-year growth. UHS beat earnings estimates in all the past four quarters, the average surprise being 14.6%. The consensus mark for its 2024 revenues signals a 9.8% increase from a year ago. Shares of the company have gained 24.8% in the past three months. It sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: UHS
Tenet Healthcare Corporation: The company offers a wide range of healthcare services through general hospitals and related healthcare units. It is experiencing substantial revenue growth, driven by increasing patient volumes in both its Ambulatory Care and Hospital segments. The Ambulatory Care unit, bolstered by the robust performance of its USPI division, is a key contributor to this success. Strategic tuck-in acquisitions have further strengthened the company's overall performance, while contractual rate increases in the Conifer unit have improved financial results.
The Zacks Consensus Estimate for THC’s 2024 bottom line is pegged at $10.70 per share, which indicates 53.3% year-over-year growth. Tenet Healthcare beat earnings estimates in all the past four quarters, the average surprise being 58.5%. The consensus mark for 2024 revenues is pegged at $20.8 billion, signaling a 1.4% increase from a year ago. Shares of the company have gained 19.6% over the past three months. It currently sports a Zacks Rank #1.
Price & Consensus: THC
HCA Healthcare: The company runs general and acute care hospitals and related facilities. The company is set for growth with increasing patient volumes and admissions. Its expansion into telemedicine is expected to enhance revenues and diversify its portfolio. The Managed Medicare operations are also anticipated to drive performance. HCA is scaling its business through strategic acquisitions and is committed to boosting shareholder value with dividend increases and share buybacks.
The Zacks Consensus Estimate for one of the biggest for-profit publicly traded hospitals’ 2024 EPS indicates 16.8% year-over-year growth. HCA Healthcare beat earnings estimates thrice in the past four quarters and missed once, the average surprise being 8.2%. The consensus mark for 2024 revenues signals an 8.9% increase from a year ago. Shares of the company have jumped 15% over the past three months. It currently has a Zacks Rank #2 (Buy).
Price & Consensus: HCA
Acadia Healthcare: The company delivers behavioral healthcare services across the United States and Puerto Rico. ACHC's performance is driven by rising patient volumes, increasing admissions and the expansion of service lines into new states. In 2024, Acadia plans to add over 400 beds to existing facilities and open up to 14 new CTCs. The company's dedication to enhancing its capabilities is further demonstrated by its active pursuit of joint ventures with established healthcare systems.
The Zacks Consensus Estimate for ACHC’s 2024 bottom line indicates 2% year-over-year growth. The consensus mark for 2024 revenues signals a 9.5% increase from a year ago. It beat on earnings in each of the last four quarters, the average surprise being 4.5%. It has a Zacks Rank #3 (Hold) at present. Shares of the company have gained 11.5% in the past three months.
Price & Consensus: ACHC
Community Health Systems: The company operates a network of general acute care hospitals and outpatient facilities across the United States. The company's robust performance is fueled by increasing patient volumes and higher occupancy rates. With a strategic focus on telehealth, CYH is poised for long-term growth. The company is pursuing acquisitions in hospitals where it can enhance specialty medical services and achieve economies of scale. Additionally, it is actively divesting non-core assets to boost profitability, improve same-store metrics and strengthen cash flow.
The Zacks Consensus Estimate for CYH’s 2024 bottom line indicates a 69.8% improvement from a year ago. The consensus mark for its 2024 revenues is pegged at $12.6 billion, signaling a 0.8% increase from a year ago. Shares of the company have gained 37.6% in the past three months. It has a Zacks Rank #3 at present.
Price & Consensus: CYH
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5 Hospital Stocks Poised to Benefit From Strong Industry Growth
The Zacks Medical-Hospital industry is facing several bullish trends like rising admissions, resumption of elective procedures, cybersecurity and other technological advancements. While increasing salaries and moderate staffing challenges may pose some obstacles, these will likely be largely offset by higher revenue per admission. Mergers and acquisitions (M&A) related activities are also seeing a strong resurgence in the hospital industry.
Industry players are increasingly focusing on capacity expansions to capture a larger market share in a fragmented industry. Companies like HCA Healthcare, Inc. (HCA - Free Report) , Universal Health Services, Inc. (UHS - Free Report) , Tenet Healthcare Corporation (THC - Free Report) , Acadia Healthcare Company, Inc. (ACHC - Free Report) and Community Health Systems, Inc. (CYH - Free Report) are likely to capitalize on these trends.
Industry Overview
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 Shaping the Industry
Growing Patient Volumes: The return of elective procedures post-pandemic has driven up patient volumes and admissions. According to the U.S. Census Bureau's revised report, the aging U.S. population, particularly the 65+ age group, is expected to fuel demand for hospital services, with this demographic projected to grow from 17.3% in 2022 to 22.8% by 2050. While concerns about medical inflation and rising costs persist, the Affordable Care Act and similar safety nets may help sustain patient volume growth. Outpatient care will likely be one of the fastest-growing businesses in the coming days.
Tackling Expense Growth: Higher patient volumes and utilization, combined with rising costs for supplies, labor, and benefits, are driving up hospital operating expenses. Despite some progress, staffing remains a challenge. To address these issues, hospitals are focusing on improving labor productivity, adopting new technologies to optimize costs, and boosting efficiency. Increased revenue per admission will help maintain margins while renegotiating supplier contracts will enhance cost management and operational efficiency.
Adapting to the Digital Age: The ransomware attack on UnitedHealth Group's Change Healthcare unit in February 2024 underscores the vital need for ongoing technological and cybersecurity advancements in healthcare. Hospital companies are increasingly leveraging AI, automation, and real-time analytics to enhance patient care, streamline workflows and reduce costs. These technologies boost operational efficiency and patient outcomes while maintaining a competitive edge. Additionally, the rise of telehealth and telemedicine, accelerated by the pandemic, continues to expand, cementing its role in modern healthcare delivery.
Revival of M&A Activity: Following a significant decline during the pandemic, M&A activity in the hospital and healthcare sector is rebounding. The industry, known for its fragmentation, is poised for a surge in M&A deals and partnership agreements in the coming quarters, which are expected to support capacity expansion efforts. According to a Deloitte report, 86% of health system executives expect M&A to be a key component of their 2024 strategic plans. Business consolidation, new technology partnerships and evolving business models are projected to substantially boost profitability for hospital operators.
Zacks Industry Rank Indicates Bullish Trends
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, signals bright near-term prospects. The Zacks Medical-Hospital industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #3, which places it in the top 1% 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 two to one.
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. As a matter of fact, the industry’s earnings estimates for 2024 have jumped 13.7% in the past year.
Before we present the stocks that you may want to monitor, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Medical-Hospital industry has fared better than its broader sector and the Zacks S&P 500 composite over the past year. During this period, the stocks in this industry have gained 40% compared with the Zacks Medical sector’s 8.4% growth. The S&P 500 index increased 26.2% during this time.
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 8.91X compared with the S&P 500’s 18.62X and the sector’s 13.97X.
Over the past five years, the industry has traded as high as 9.55X and as low as 5.57X, with a median of 7.87X, as the charts below show.
EV/EBITDA Ratio (Past 5 Years)
5 Stocks Worth Your Attention
Universal Health Services: The company operates acute care facilities, outpatient centers and behavioral health care units. It specializes in areas like autism, eating disorders, substance use disorders and military-related issues through its Patriot Support Program. It is seeing growth driven by an increase in patient days and a broadening care network. The expansion of licensed beds in acute care hospitals and strategic joint ventures in behavioral health are likely to further propel the company's growth.
The Zacks Consensus Estimate for Universal Health’s 2024 bottom line indicates 51% year-over-year growth. UHS beat earnings estimates in all the past four quarters, the average surprise being 14.6%. The consensus mark for its 2024 revenues signals a 9.8% increase from a year ago. Shares of the company have gained 24.8% in the past three months. It sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: UHS
Tenet Healthcare Corporation: The company offers a wide range of healthcare services through general hospitals and related healthcare units. It is experiencing substantial revenue growth, driven by increasing patient volumes in both its Ambulatory Care and Hospital segments. The Ambulatory Care unit, bolstered by the robust performance of its USPI division, is a key contributor to this success. Strategic tuck-in acquisitions have further strengthened the company's overall performance, while contractual rate increases in the Conifer unit have improved financial results.
The Zacks Consensus Estimate for THC’s 2024 bottom line is pegged at $10.70 per share, which indicates 53.3% year-over-year growth. Tenet Healthcare beat earnings estimates in all the past four quarters, the average surprise being 58.5%. The consensus mark for 2024 revenues is pegged at $20.8 billion, signaling a 1.4% increase from a year ago. Shares of the company have gained 19.6% over the past three months. It currently sports a Zacks Rank #1.
Price & Consensus: THC
HCA Healthcare: The company runs general and acute care hospitals and related facilities. The company is set for growth with increasing patient volumes and admissions. Its expansion into telemedicine is expected to enhance revenues and diversify its portfolio. The Managed Medicare operations are also anticipated to drive performance. HCA is scaling its business through strategic acquisitions and is committed to boosting shareholder value with dividend increases and share buybacks.
The Zacks Consensus Estimate for one of the biggest for-profit publicly traded hospitals’ 2024 EPS indicates 16.8% year-over-year growth. HCA Healthcare beat earnings estimates thrice in the past four quarters and missed once, the average surprise being 8.2%. The consensus mark for 2024 revenues signals an 8.9% increase from a year ago. Shares of the company have jumped 15% over the past three months. It currently has a Zacks Rank #2 (Buy).
Price & Consensus: HCA
Acadia Healthcare: The company delivers behavioral healthcare services across the United States and Puerto Rico. ACHC's performance is driven by rising patient volumes, increasing admissions and the expansion of service lines into new states. In 2024, Acadia plans to add over 400 beds to existing facilities and open up to 14 new CTCs. The company's dedication to enhancing its capabilities is further demonstrated by its active pursuit of joint ventures with established healthcare systems.
The Zacks Consensus Estimate for ACHC’s 2024 bottom line indicates 2% year-over-year growth. The consensus mark for 2024 revenues signals a 9.5% increase from a year ago. It beat on earnings in each of the last four quarters, the average surprise being 4.5%. It has a Zacks Rank #3 (Hold) at present. Shares of the company have gained 11.5% in the past three months.
Price & Consensus: ACHC
Community Health Systems: The company operates a network of general acute care hospitals and outpatient facilities across the United States. The company's robust performance is fueled by increasing patient volumes and higher occupancy rates. With a strategic focus on telehealth, CYH is poised for long-term growth. The company is pursuing acquisitions in hospitals where it can enhance specialty medical services and achieve economies of scale. Additionally, it is actively divesting non-core assets to boost profitability, improve same-store metrics and strengthen cash flow.
The Zacks Consensus Estimate for CYH’s 2024 bottom line indicates a 69.8% improvement from a year ago. The consensus mark for its 2024 revenues is pegged at $12.6 billion, signaling a 0.8% increase from a year ago. Shares of the company have gained 37.6% in the past three months. It has a Zacks Rank #3 at present.
Price & Consensus: CYH