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4 Hospital Stocks to Inject Into Your Portfolio - Analyst Blog

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The S&P 500 has been on a historic run for the past two plus years, but has seen some pullback in recent weeks. Analysts had been giving the warnings signs of a market correction for several months, and in August, the market began to contract.

Given this sustained growth for the index, and its recent pull-back, it is now becoming more difficult to find strong stocks let alone low risk segments. Yet, there is one segment that has consistent demand, increasing users, and high technology innovation, which is beginning to see significant upticks in earnings, and increased revenues.

Healthcare: Specifically Medical-Hospitals

After the first six months of the Affordable Care Act's (ACA) implementation, Hospitals have seen a sizable uptick in newly insured patients utilizing hospitals for a wide range of services. This has caused revenues for the hospitals to increase during this time frame.

The main drivers behind the revenue increase are maternity care, and a strong uptick in other procedures by previously uninsured people who just enrolled in the new Health Care Law. It is assumed that the previously uninsured people were delaying procedures due to the cost. Further, hospitals have seen more activity from their Medicaid programs as well. Another plus to the top line.

It is estimated that around 8 million people had signed up with health-law marketplaces in the eight months between September '13, and April '14, not accounting for the millions who have signed up for the state run Medicaid programs. It is estimated that 33% to 50% of all Hospital gains are due to the new ACA law. This indicates that when more people sign up for the exchanges, Hospitals will see their revenues increase even further.

Further, many hospitals have seen significant increases in Emergency Room visits, even though new enrollees are given the option to seek services at urgent care centers or community doctor's offices.

Finally, hospitals have begun to see a significant drop in uninsured admissions, which has helped both the top and bottom lines. This trend is expected to continue into the near future.

While in every capitalistic system, there are winners and losers, not all hospitals are seeing a strong influx of new patients, or increased ER usage. But we have found 4 stellar hospitals that have seen strong patient growth, and increased revenues.

Hospitals to Consider for your Portfolio

HCA Holdings Inc. ( HCA ) a Zacks Rank #1 (Strong Buy) reported inline Q2 earnings per share, and beat the Zacks Consensus Revenue Estimate by $179 million. The company experienced continued growth in exchange and Medicaid volumes, which attributed to about 1/3 EBITA via the ACA law, and 2/3 to improved core operations. Medicaid admissions increased 32% YTD, and saw uninsured admissions decline 48%. Exchange admissions saw 5,500 new patients in Q2 compared to 1,700 in Q1. Further, the Hospital saw new exchange admissions of 1,300 in April, 2,000 in May, and 2,200 in June. New admissions are expected to tapper a bit going past June.

These strong Q2 numbers have caused the Zacks Consensus Earnings Estimates to rise across the board: In the past 30 days, EPS estimates for Q3, Q4, FY 14, and FY 15 have all increased. Q3 estimates have risen from $0.90 to $0.96, Q4 increased from $1.05 to $1.10, FY 14 jumped from $3.71 to $4.21, and FY 15 rose from $4.37 to $4.68.

Universal Health Services ( UHS ) a Zacks Rank #1 (Strong Buy) posted earnings and revenue beats during their Q2 earnings call. These beats were due to increased volume, pricing growth, reduction in uninsured volumes, and improvement in core markets. The company saw a 3.6% increase in admissions, above the forecast of -0.3% and a -0.5% decline in Q1 14; which was primarily due to the ACA, and newly insured patients coming to the hospital. The hospital also decreased their uninsured admissions levels as well, increasing total revenue.

During the Q2 announcement, the board stated that they have authorized $400 million in share repurchases, replacing the previous authorization that had less than $1 million remaining. Further, management also increased their dividend from $0.05 to $0.10.

Most importantly, management raised the full year guidance from between $4.80-$5.10 to a range of $5.55-$5.85. This has caused the Zacks Consensus Earnings Estimates for FY 14 to jump from $5.11 to $5.81 in the past 30 days. Moreover, Q3, Q4, and FY 15 Earnings Estimates have increased over the past 30 days as well. Q3 has risen from $1.20 to $1.36, Q4 has increased from $1.29 to $1.46, and FY 15 jumped from $5.75 to $6.27.

Lifepoint Hospitals Inc. ( LPNT ), a Zacks Rank #2 (Buy) was another hospital with strong Q2 earnings results; beating the bottom line by $0.29 and coming in $24 million ahead of the Zacks Consensus Revenue Estimate. Much of the Q2 gains were attributed to the benefit from ACA exchanges. Moreover, in expansion states (states with an exchange), the company saw a 67% decrease in uninsured admissions. Further, management stated that they expected between 10%-15% new individuals eligible for exchange products, but actually 25%-30% were new individuals. This number is expected to grow out through 2015. Finally, the company saw an increase of 2.0% year over year in adjusted admissions growth, which was the strongest since Q4 '06.

Due to the strong Q2 performance, management increased FY 14 guidance from a range of $2.38-$2.78 to $2.99-$3.20, and EBITA from a range of $560-$590 million to a range of $605-$620 million.

The increased guidance caused the Zacks Consensus Earnings Estimates for Q3, Q4, FY 14, and FY 15 to increase over the past 30 days. Q3 Estimated EPS risen from $0.64 to $0.73, Q4 rose from $0.83 to $0.88, FY 14 jumped from $2.70 to $3.11, and FY 15 increased from $3.15 to $3.53.

Tenet Healthcare Corp. ( THC ), a Zacks Rank #2 (Buy) crushed their earnings estimates for Q2 2014. The Zacks Consensus Earnings Estimate was at $0.00, but THC came in at $0.17, and also solidly beat the Zacks Consensus Revenue Estimate by $113 million. And you guessed it, the main driver behind the earnings beat was the ACA law.

During the quarter, the company saw a 4.0% increase in adjusted admissions (strongest in past 10 years), underlying the benefits from the ACA (Medicaid, and the exchanges). Further, the company saw additional positive news come from their payer mix, and commercial admissions. Management stated that they feel well positioned to gain from the benefits from their high exposure to the ACA law, and the exchanges. Moreover, the company saw a 54% decline in uninsured admissions within their exchange states (combined exchange states and non-exchange states was a 22% decline).

Due to the strong showing in Q2, management conservatively raised their EBITA guidance by $50 million to $1.85-$1.95 billion for FY 14. This has caused the Zacks Consensus Earnings Estimate for Q4, FY 14, and FY 15 to increase in the past 30 days. Q4 increased from $0.91 to $1.26, FY 14 rose from $1.28 to $1.44, and FY 15 increased from $2.59 to $2.83.

Bottom Line

Hospital stocks are reaping the benefits from the ACA law, its exchanges, and Medicaid. As we are just 6 months into the inaction of the law, we are beginning to separate the winners and losers, and the Hospitals are winning! So if you are inclined to look into the Hospital segment, we suggest looking into the four above mentioned companies for strong positive earnings growth through 2014, and into 2015.

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LIFEPOINT HOSP (LPNT): Free Stock Analysis Report

TENET HEALTH (THC): Free Stock Analysis Report

UNIVL HLTH SVCS (UHS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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