Markets have been rocky lately, with the S&P 500 index making a roughly 200 point round trip over the last three months. Worries about international growth in the wake of soft headlines out of Germany and elsewhere in Europe and never ending concerns about China’s outlook have been the key drivers. But there has been no shortage of headwinds lately, ranging from international military conflicts to Ebola fears. The market has recouped most of its recent losses and many expect the post midterm elections period to be a good one for stocks. But as the recent downturn shows, investor sentiment could shift very quickly.
Looking for Growth and Defense
During this time of uncertainty, with the markets shifting almost on a daily basis, I wanted to see if there was any area that was semi-immune to these market swings, and that also showed a growth story. My models showed that the Medical-Hospital Segment, currently ranked #7 out of 258 total segments has been able to withstand the recent market fluctuations, and show solid positive earnings over the past few quarters.
Why Medical-Hospital Sector
The Medical-Hospital sector has seen significant growth since the passage of the ACA (Affordable Care Act). According to Department of Health and Human Services, “Among hospitals in stats that expanded Medicaid, the number of uninsured patients admitted declined between 48% and 72% between Q2 2013 and Q2 2014. This has caused hospital’s margins to significantly grow during this time frame. Further, the added savings are being utilized by several Medical Hospital companies to acquire more hospitals, and care centers. This leads to increased growth for these hospitals.
My models came back with three very strong Medical Hospitals, that have posted solid earnings, and that have been very active in the acquisition arena. All three of these stocks carry either a Zacks Rank #1 (Strong Buy), or a Zacks Rank #2 (Buy).
Who to Consider
Acadia Healthcare (NASDAQ:ACHC) a Zacks Rank #1 (Strong Buy) provides inpatient behavioral health care services. It provides psychiatric and chemical dependency services, including inpatient psychiatric hospitals, residential treatment centers, outpatient clinics, and therapeutic school-based programs.
Acadia, just reported Q314 Earnings and Revenues, and beat on both sides. This was the second consecutive earnings and revenue beat by this company, and has posted a 4 quarter average positive surprise of 48.31%. Further, due to the strong earnings, the Zacks Consensus Earnings Estimate for Q4 14, FY 14, Q1 15, and FY 15 have all increased within the past week. Q4 Earnings Estimates have risen from $0.44 to $0.46, FY 14 increased from $1.46 to $1.53, Q1 15 jumped from $0.45 to $0.50, and FY 15 rose from $1.97 to $2.19.
The main factor behind the increased guidance due to the recent acquisition of CRC Health Group, which is to be finalized in Q1 2015 at a cost of $1.175 billion. The acquisition will add 30 inpatient, and 16 outpatient facilities along with 58 treatment centers located across 21 states.
The chart below shows the Price and Consensus Estimate for Acadia. You will notice the high expectations for this company over the near future.
HCA Holdings (NYSE:HCA) a Zacks Rank #1 (Strong Buy) is a non-governmental hospital in the U.S. providing healthcare and related services. The company operates a network of acute care hospitals, outpatient facilities, clinics and other patient care delivery settings.
HCA just reported Q3 earnings and revenues which both came in above expectations, but that was not the only positive news to come out of the recent earnings announcement. HCA Holdings announced the acquisition of CareNow, a Dallas-Fort Worth company that owns a chain of 24 urgent care centers, and the board’s approval of a $1 billion share repurchase program. The acquisition of CareNow adds to the 11 hospitals currently under HCA’s umbrella of operations in Texas.
This positive news has caused the Zacks Consensus Earnings Estimates for Q4 14, Q1 15, FY 2014, and FY 2015 over the past 30 days. Q4 estimates have risen from $1.10 to $1.17, Q1 15 increased from $1.11 to $1.18, FY 14 rose from $4.22 to $4.54, and FY 15 increased from $4.75 to $5.04.
The chart below shows the Price and Consensus Estimate for HCA. Like Acadia, you will notice strong upticks in expectations over the next several quarters.
LifePoint Hospitals (NASDAQ:LPNT) a Zacks Rank #2 (Buy) is engaged in the operation of general, acute care hospitals in non-urban communities. The company’s general, acute care hospitals usually provide the range of medical and surgical services commonly available in hospitals in non-urban markets.
LifePoint recently announced third quarter results, which beat both the top and bottom lines for the second consecutive quarter. Revenues grew 29.55% year over year, and same store margins experienced an improved 150 bps for the quarter.
Like our other 2 Hospital stocks, LifePoint has been active in the acquisition arena, and their recent acquisitions, Conemaugh, and Haywood/Westcare hospitals, have added nicely to the top line. The Conemaugh acquisition added 3 hospitals, its outpatient centers, and the Conemaugh Physician Group practices. The Haywood/Westcare acquisition brought another 3 hospitals, an outpatient medical facility under LifePoint’s umbrella.
Due to all these factors, the Zacks Consensus Earnings Estimates have risen for Q4, Q1, FY 14 and FY 15 over the past 30 days. Further, management also raised guidance for FY 14 from a range of $2.99-$3.19 to a range of $3.26-$3.39.
The chart below shows the recent price and EPS surprise. As you can see after the last 2 positive earnings surprises, the stock experienced a sustained uptick.
Bottom Line
All these stocks carry a very low beta (risk level), and with the uncertainty of the market over the next few months, it would be a wise idea to take a look at these low risk growth companies. Further, the increased acquisition levels these three companies have been upon for the past few quarters helps enable the companies to spread risk, and increase organic growth opportunities.