Increasing patient volumes and admissions are fueling growth for companies in the Zacks Medical-Hospital industry. Continuous technological innovation and digital transformation efforts are enhancing efficiency and positioning these companies for long-term success. With COVID-19 restrictions easing, M&A and consolidation activities are bouncing back in the hospital sector. Challenges such as medical inflation and workforce shortages, alongside heightened competition, are tempering industry profits. Nevertheless, investments in technological upgrades are expected to provide a competitive advantage. Companies like HCA Healthcare, Inc. HCA, Universal Health Services, Inc. UHS and Tenet Healthcare Corporation THC are poised 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 Defining the Industry's Prospects
Harnessing the Digital Frontier: Hospital companies are embracing continuous technological innovation to improve services. This transition optimizes operations, cuts costs, enhances convenience and enriches the overall patient experience. The ransomware hack on the UnitedHealth Group Incorporated unit Change Healthcare in February 2024 underscores the imperative of ongoing technological and cybersecurity advancements in the healthcare space. Companies are integrating AI and automation alongside real-time analytics to deliver superior care. AI assists in refining clinical workflow management and medical diagnoses, reducing patient wait times and treatment expenses. The adoption of telehealth and telemedicine, accelerated by the COVID-19 pandemic, is likely to continue its upward trajectory.
Surging Patient Volumes: The rebound of deferred elective procedures post-pandemic has driven patient volumes and utilization in recent quarters. However, concerns persist for patients regarding medical inflation, rising coverage costs and financial constraints, leading to delays in addressing non-emergency medical needs. Despite potential deterrents, such as increasing out-of-pocket costs, factors like the Affordable Care Act and other safety nets may offer some relief. The U.S. Census Bureau's revised report predicts a rapid growth in the 65+ age group, driven by scientific and healthcare advancements, which is amplifying demand for hospital services. Per IBISWorld, the industry’s market size grew 3.8% last year.
Increasing Costs: The surge in patient volumes, along with rising hospital supply prices, salaries, wages and benefits amid inflationary pressures, is projected to amplify hospital players' operating costs. Despite some signs of improvement, workforce challenges remain a concern. To address this, companies are strategically focusing on enhancing labor productivity and integrating new technologies to optimize expenditure. Furthermore, leveraging contract renegotiations with suppliers and vendors will help the companies’ cost management and operational efficiency.
Revival of M&A Activity: After a sharp decline during the COVID-19 pandemic, merger-and-acquisition (M&A) activity in hospitals and health systems is experiencing a rebound. The fragmented industry is expected to witness numerous deals in the near future. According to a Deloitte report, 86% of surveyed health system executives expect M&A to substantially impact their 2024 strategic plans. Business consolidation, new tech partnerships and evolving business models have the potential to significantly enhance profitability for hospital companies.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, signals promising near-term prospects. The Zacks Medical-Hospital industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #62, which places it in the top 25% 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. Since Dec 31, 2023, the Zacks Consensus Estimate for the industry’s 2024 earnings has improved 4.7%.
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 but Lags S&P 500
The Zacks Medical-Hospital industry has fared better than its broader sector over the past year but lagged the Zacks S&P 500 composite. During this period, the stocks in this industry have gained 23.8% compared with the Zacks Medical sector’s 7.7% rise. The S&P 500 index jumped 26.5% 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 9.56X compared with the S&P 500’s 14.28X and the sector’s 11.75X.
Over the past five years, the industry has traded as high as 9.58X and as low as 5.57X, with a median of 7.82X, as the charts below show.
EV/EBITDA Ratio (Past 5 Years)
3 Stocks Worth Your Attention
HCA Healthcare: The company operates a range of services, including surgery centers, free-standing emergency rooms, physician clinics, and urgent care centers. With increasing patient volumes and admissions, HCA is well-positioned for growth. The company's expansion into telemedicine is projected to boost revenues. Additionally, its Managed Medicare operations are poised to drive its performance. Through strategic acquisitions and a focus on enhancing shareholder value via dividend increases and share repurchases, HCA is scaling its business and prioritizing investor returns, respectively.
The Zacks Consensus Estimate for one of the biggest for-profit publicly traded hospitals’ 2024 EPS indicates 7.8% year-over-year growth. The consensus mark for 2024 revenues signals a 6.2% increase from a year ago. HCA Healthcare beat earnings estimates thrice in the past four quarters and missed once, the average surprise being 9.8%. Shares of the company have jumped 23.9% over the past year. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: HCA
Universal Health Services: The company operates acute care facilities, outpatient centers and behavioral health care units, with a specialized focus on behavioral indications, including autism, eating disorders, substance use disorder and military disorderliness through its Patriot Support Program. The company benefits from growing patient days and a comprehensive care network. The expansion of licensed beds in acute care hospitals and strategic joint ventures in the behavioral health portfolio is expected to drive growth.
The Zacks Consensus Estimate for Universal Health’s 2024 bottom line indicates 17.8% year-over-year growth. The consensus mark for its 2024 revenues signals an 8.8% increase from a year ago. UHS beat earnings estimates in all the past four quarters, the average surprise being 5.9%. Shares of the company have gained 35.9% in the past year. It sports a Zacks Rank #1 at present.
Price & Consensus: UHS
Tenet Healthcare Corporation: The company provides diversified healthcare services, primarily through general hospitals and related healthcare units. Expanding patient volumes are leading to strong revenue growth in the Ambulatory Care and Hospital segments. Its Ambulatory Care unit is significantly bolstered by robust performance in its USPI division. Tuck-in acquisitions contribute to the company's overall success and contractual rate increases in the Conifer unit further enhance its financial performance. The company also doesn’t shy away from divesting non-core assets to improve profitability.
The Zacks Consensus Estimate for THC’s 2024 bottom line is pegged at $5.93 per share, which improved 3.7% over the past 30 days. The consensus mark for 2024 revenues is pegged at $20.1 billion. Tenet Healthcare beat earnings estimates in all the past four quarters, the average surprise being 31.6%. Shares of the company have gained 57.6% over the past year. It has a Zacks Rank #3 (Hold) at present.
Price & Consensus: THC
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