Going by the first-quarter 2015 financial figures, the Medical sector has topped the charts with an earnings beat ratio of 78.4% and revenue beat ratio of 60.8%. We particularly note the impressive year-over-year revenue growth of 10.3%, which reflects robust performance from hospitals, managed healthcare, biotechnology and healthcare service stocks.
The Medical/Healthcare sector is expected to continue to drive investor returns primarily based on positive industry trends. Per the Centers for Medicare and Medicaid Services’ (CMS) projection, total U.S. healthcare spending will grow by 5.7% on average annually through 2023 as a result of the increasing number of insured patients (due to the Affordable Care Act/Obamacare), faster projected economic growth and the aging of the population.
We believe that higher spending bodes particularly well for the hospital service providers. The expansion of Medicaid into states like Pennsylvania and Indiana is likely to reduce the amount hospitals expend on charity care, which will boost their earnings. Also, lower bad debts and the simultaneous increase in admission rates owing to improving affordability among patients are significant positives for these providers.
3 Value Picks in the Hospital Sector
Value investing aims at finding out stocks that have been ignored by the market, and are trading cheap.
Our Value Style Score, which is part of our Style Score System, condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with Style Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential.
Using these criterions, we have handpicked the following three hospital stocks:
HCA Holdings Inc (NYSE:HCA)
Headquartered in Nashville, TN, HCA Holdings carries a Zacks Rank #2 with a value style score of ‘A.’ As of Mar 31, 2015, the company and its affiliates operated 168 hospitals, 113 freestanding surgery centers and provided extensive outpatient and ancillary services in 20 states and in England.
HCA Holdings has a P/S of 0.88x, P/E of 15.56x and PEG of 1.48x, which is quite favorable when compared with industry averages of 1.19x, 19.91x and 1.88x, respectively. Further, over the last four quarters, the company has delivered an average positive earnings surprise of 2%.
For the second quarter of 2015, the earnings estimate has moved north by 4.8% (6 cents) to $1.32 per share, as 9 out of 13 forecasts moved higher over the last 30 days. The trend is also favorable for full-year 2015 and 2016. Currently, earnings estimates for 2015 and 2016 are pegged at $5.24 and $5.78 per share, up 3.1% (16 cents) and 3.4% (19 cents), respectively.
Tenet Healthcare Corp (NYSE:THC)
Headquartered in Dallas, TX, Tenet Healthcare owns and operates general hospitals and related health care facilities. As of Mar 31, 2015, the company operated 80 hospitals, 215 outpatient centers, six health plans and Conifer Health Solutions. The company carries a Zacks Rank #2 and a value style score of ‘A.’
Tenet has a forward P/S of 0.30x, which is way lower than the industry average of 1.19x. Moreover, over the last four quarters, the company has delivered an impressive average positive earnings surprise of 120.65%.
For the second quarter of 2015, the earnings estimate has surged 31.6% (12 cents) to stand at 50 cents per share, as 8 out of 11 estimates moved up over the past one month. A similar positive trend can be observed for full-year 2015 and 2016 with earnings estimates pegged at $2.24 and $2.73 per share, up 12% (24 cents) and 2.6% (19 cents), respectively.
Universal Health Services Inc (NYSE:UHS)
Headquartered in King of Prussia, PA, Universal Health Services has a Zacks Rank #2 and a value style score of ‘B.’ As of Mar 31, 2015, the company owned and/or operated 24 acute care hospitals and 217 behavioral health centers across 37 states along with Washington, D.C., the United Kingdom, Puerto Rico and the U.S. Virgin Islands.
Universal Health boasts a P/E of 19.24x and P/B of 3.16x, which compare favorably with the respective industry average of 19.91x and 3.45x. The company has reported an average positive earnings surprise of 9.16% in the last four quarters.