Tenet Healthcare Corp At Ubs Global Healthcare Conference

Shares of The Cigna Group CI jumped 7.3% yesterday after it clarified in a press release that it's not pursuing a merger with Humana Inc. HUM. Recent speculation suggested a possible merger deal due to a potentially more business-friendly environment following the presidential election.

However, Cigna put these rumors to rest, clarifying that its M&A criteria includes only acquisitions that are strategically aligned, financially attractive and have a high likelihood of closing. The stock price jump indicates investor support for this clear strategic stance.

In contrast, rival Humana’s shares dropped 2% as Cigna’s announcement cooled any optimism surrounding a potential merger. Humana’s business is currently facing challenges from higher-than-expected claims and lower-than-anticipated government payment rate increases. Additionally, the quality rating of Humana’s largest Medicare Advantage plan was recently downgraded by the government, which will likely impact the quality bonuses the company stands to receive.

CI’s Reaffirmed Outlook

With speculation about a merger now settled, Cigna investors can shift their focus to the company’s projected growth for this year rather than speculating about its future direction. CI reaffirmed its 2024 outlook, projecting full-year adjusted EPS to be a minimum of $28.40. This indicates growth of at least 13.2% from the 2023 figure. The company also estimates adjusted EPS growth of at least 10% in 2025, reinforcing confidence in its growth trajectory.

CI’s Buybacks

The company is expected to continue its efforts to enhance shareholder value through share repurchases. So far this year, Cigna has bought back $6 billion worth of stocks, including $1 billion in the current quarter. It intends to maintain the buybacks through the remainder of this quarter and into next year. It plans to use most of the proceeds from the anticipated first-quarter 2025 sale of its Medicare businesses for additional buybacks. It currently has $5.3 billion left under its share repurchase fund.

CI’s YTD Price Performance

Shares of Cigna have gained 14.6% in the year-to-date period compared with the 9.9% rise of the industry it belongs to.

If you're interested in broad exposure to the Mid Cap Value segment of the US equity market, look no further than the Vanguard S&P Mid-Cap 400 Value ETF (IVOV), a passively managed exchange traded fund launched on 09/09/2010.

The fund is sponsored by Vanguard. It has amassed assets over $993.97 million, making it one of the average sized ETFs attempting to match the Mid Cap Value segment of the US equity market.

Why Mid Cap Value

Compared to large and small cap companies, mid cap businesses tend to have higher growth prospects and are less volatile, respectively, with market capitalization between $2 billion and $10 billion. These types of companies, then, have a good balance of stability and growth potential.

Value stocks are known for their lower than average price-to-earnings and price-to-book ratios, but investors should also note their lower than average sales and earnings growth rates. When you look at long-term performance, value stocks have outperformed growth stocks in nearly all markets. But in strong bull markets, growth stocks are more likely to be winners.

Costs

Since cheaper funds tend to produce better results than more expensive funds, assuming all other factors remain equal, it is important for investors to pay attention to an ETF's expense ratio.

Annual operating expenses for this ETF are 0.15%, making it one of the least expensive products in the space.

It has a 12-month trailing dividend yield of 1.29%.

Sector Exposure and Top Holdings

It is important to delve into an ETF's holdings before investing despite the many upsides to these kinds of funds like diversified exposure, which minimizes single stock risk. And, most ETFs are very transparent products that disclose their holdings on a daily basis.

This ETF has heaviest allocation to the Financials sector--about 25.90% of the portfolio. Industrials and Consumer Discretionary round out the top three.

Looking at individual holdings, Illumina Inc (ILMN) accounts for about 1.52% of total assets, followed by Tenet Healthcare Corp (THC) and Fidelity National Financial Inc (FNF).

The top 10 holdings account for about 8.51% of total assets under management.

Performance and Risk

IVOV seeks to match the performance of the S&P MidCap 400 Value Index before fees and expenses. The S&P MidCap 400 Value Index measures the performance of value stocks of medium-size U.S. companies.

The ETF has added roughly 17.90% so far this year and was up about 37.35% in the last one year (as of 11/12/2024). In the past 52-week period, it has traded between $75.55 and $102.79.

The ETF has a beta of 1.15 and standard deviation of 19.90% for the trailing three-year period, making it a medium risk choice in the space. With about 297 holdings, it effectively diversifies company-specific risk.

Alternatives

Vanguard S&P Mid-Cap 400 Value ETF carries a Zacks ETF Rank of 3 (Hold), which is based on expected asset class return, expense ratio, and momentum, among other factors. Thus, IVOV is a reasonable option for those seeking exposure to the Style Box - Mid Cap Value area of the market. Investors might also want to consider some other ETF options in the space.

The iShares Russell Mid-Cap Value ETF (IWS) and the Vanguard Mid-Cap Value ETF (VOE) track a similar index. While iShares Russell Mid-Cap Value ETF has $14.11 billion in assets, Vanguard Mid-Cap Value ETF has $18.57 billion. IWS has an expense ratio of 0.23% and VOE charges 0.07%.

Bottom-Line

Passively managed ETFs are becoming increasingly popular with institutional as well as retail investors due to their low cost, transparency, flexibility and tax efficiency. They are excellent vehicles for long term investors.

To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.

Zacks Investment Research

For Immediate Release

Chicago, IL – November 12, 2024 – Today, Zacks Equity Research like HCA Healthcare, Inc. HCA, Tenet Healthcare Corp. THC, Universal Health Services, Inc. UHS, Acadia Healthcare Company, Inc. ACHC and Community Health Systems, Inc. CYH.

Industry: Hospital

Link: https://www.zacks.com/commentary/2368306/5-hospital-stocks-set-to-thrive-amid-robust-industry-trends

The Zacks Medical-Hospital industry is benefiting from several positive trends, including growing admissions, resumption of elective procedures, technological advancements, a favorable payer mix and service line expansions. Although increasing salaries, benefits, and moderate staffing challenges may create some hurdles, these are expected to be largely offset by higher revenue per admission.

Mergers and acquisitions (M&A) are likely to drive growth in the hospital sector as companies focus on expanding capacity to gain market share in this fragmented industry. Key players such as HCA Healthcare, Inc., Tenet Healthcare Corp., Universal Health Services, Inc., Acadia Healthcare Company, Inc. and Community Health Systems, Inc. are well-positioned to take advantage of 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

Rising Patient Volumes: The resumption of elective procedures post-pandemic is boosting patient volumes and admissions. According to the U.S. Census Bureau's revised report, the 65+ age group will grow from 17.3% of the population in 2022 to 22.8% by 2050. This is expected to fuel demand for hospital services. Although medical inflation and rising costs remain concerns, safety nets like the Affordable Care Act could help maintain patient volume growth. Outpatient care, in particular, is expected to become one of the fastest-growing segments in the near future.

Addressing Cost Pressures: Increasing patient volumes and utilization, along with rising costs for supplies, labor, and benefits, are pushing hospital operating expenses higher. Staffing remains a challenge, though some progress has been made. To manage these pressures, hospitals are improving labor productivity, adopting cost-optimizing technologies, and enhancing efficiency. Higher revenue per admission will help sustain margins, while renegotiated supplier contracts are expected to strengthen cost control and operational efficiency.

Embracing Digital Transformation: The February 2024 ransomware attack on UnitedHealth Group's Change Healthcare unit highlights the critical importance of robust technological and cybersecurity measures in healthcare. To enhance patient care, streamline workflows, and manage costs, hospitals are increasingly adopting AI, automation, and real-time analytics. These technologies will not only improve operational efficiency and patient outcomes but will also help healthcare providers maintain a competitive edge. The growth of telehealth and telemedicine, fast-tracked by the pandemic, continues to reshape and solidify its place in modern healthcare delivery.

Resurgence in M&A Activity: After a pandemic-driven slowdown, M&A in the hospital and healthcare sector has made a comeback. The industry, characterized by fragmentation, is set for a wave of M&A deals and partnerships in the coming quarters aimed at expanding capacity. Business consolidation, tech partnerships, and new business models are expected to significantly enhance 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 #28, which places it in the top 11% 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. In fact, the industry’s earnings estimates for 2024 and 2025 have jumped 17.5% and 17%, respectively, in the past year.

Before we present the stocks that you may want to watch, 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 53.5% compared with the Zacks Medical sector’s 12.2% growth. The S&P 500 index has increased 36% during this time.

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 8.23X compared with the S&P 500’s 18.56X and the sector’s 13.16X.

Over the past five years, the industry has traded as high as 9.55X and as low as 5.57X, with a median of 7.99X.

5 Stocks Worth Your Attention

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 in this unit are further strengthening the company's overall performance.

The Zacks Consensus Estimate for THC’s 2024 bottom line is pegged at $11.39 per share, which indicates 63.2% year-over-year growth. Tenet Healthcare beat earnings estimates in all the past four quarters, the average surprise being 59.9%. The consensus mark for 2024 revenues is pegged at $20.8 billion, signaling a 1% increase from a year ago. Shares of the company have gained 31% over the past six months. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

HCA Healthcare: The company runs general and acute care hospitals and related facilities. It is set for growth with increasing patient volumes and admissions. Its expansion into telemedicine is expected to enhance revenues and diversify its portfolio. Growing number of inpatient and same-facility emergency room visits are aiding its 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 15.8% year-over-year growth. HCA Healthcare beat earnings estimates in each of the past four quarters, the average surprise being 9%. The consensus mark for 2024 revenues signals an 8.5% increase from a year ago. Shares of the company have jumped 11.7% over the past six months. It currently has a Zacks Rank #3 (Hold).

Universal Health Services: It 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 51.1% year-over-year growth. UHS beat earnings estimates in three of the past four quarters and missed once, the average surprise being 12.1%. The consensus mark for its 2024 revenues signals a 9.8% increase from a year ago. Shares of the company have gained 16.2% in the past six months. It has a Zacks Rank #3 at present.

Acadia Healthcare: It 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 is pegged at $3.43 per share. The consensus mark for 2024 revenues signals a 7.9% increase from a year ago. It beat on earnings in each of the last four quarters, the average surprise being 3.9%. It has a Zacks Rank #3 at present. Shares of the company have declined 43% in the past six months as investors might be worried about its reduced revenue and EBITDA outlook for 2024. Due to the sale of two subscale satellite programs, its figures might decline in the short term.

Community Health Systems: It operates a network of general acute care hospitals and outpatient facilities across the United States. The company's robust performance is fueled by higher occupancy rates. With a strategic focus on telehealth, CYH is poised for long-term growth. It is pursuing acquisitions in hospitals to 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 divestments might affect its nominal figures in the short term.

The Zacks Consensus Estimate for CYH’s 2024 bottom line indicates a 65.5% improvement from a year ago. The consensus mark for its 2024 revenues is pegged at $12.5 billion, signaling a 0.3% increase from a year ago. Shares of the company have gained 30.9% in the past six months. It has a Zacks Rank #3 at present.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.

Zacks Investment Research

The Zacks Medical-Hospital industry is benefiting from several positive trends, including growing admissions, resumption of elective procedures, technological advancements, a favorable payer mix and service line expansions. Although increasing salaries, benefits, and moderate staffing challenges may create some hurdles, these are expected to be largely offset by higher revenue per admission.

Mergers and acquisitions (M&A) are likely to drive growth in the hospital sector as companies focus on expanding capacity to gain market share in this fragmented industry. Key players such as HCA Healthcare, Inc. HCA, Tenet Healthcare Corporation THC, Universal Health Services, Inc. UHS, Acadia Healthcare Company, Inc. ACHC and Community Health Systems, Inc. CYH are well-positioned to take advantage of 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

Rising Patient Volumes: The resumption of elective procedures post-pandemic is boosting patient volumes and admissions. According to the U.S. Census Bureau's revised report, the 65+ age group will grow from 17.3% of the population in 2022 to 22.8% by 2050. This is expected to fuel demand for hospital services. Although medical inflation and rising costs remain concerns, safety nets like the Affordable Care Act could help maintain patient volume growth. Outpatient care, in particular, is expected to become one of the fastest-growing segments in the near future.

Addressing Cost Pressures: Increasing patient volumes and utilization, along with rising costs for supplies, labor, and benefits, are pushing hospital operating expenses higher. Staffing remains a challenge, though some progress has been made. To manage these pressures, hospitals are improving labor productivity, adopting cost-optimizing technologies, and enhancing efficiency. Higher revenue per admission will help sustain margins, while renegotiated supplier contracts are expected to strengthen cost control and operational efficiency.

Embracing Digital Transformation: The February 2024 ransomware attack on UnitedHealth Group's Change Healthcare unit highlights the critical importance of robust technological and cybersecurity measures in healthcare. To enhance patient care, streamline workflows, and manage costs, hospitals are increasingly adopting AI, automation, and real-time analytics. These technologies will not only improve operational efficiency and patient outcomes but will also help healthcare providers maintain a competitive edge. The growth of telehealth and telemedicine, fast-tracked by the pandemic, continues to reshape and solidify its place in modern healthcare delivery.

Resurgence in M&A Activity: After a pandemic-driven slowdown, M&A in the hospital and healthcare sector has made a comeback. The industry, characterized by fragmentation, is set for a wave of M&A deals and partnerships in the coming quarters aimed at expanding capacity. Business consolidation, tech partnerships, and new business models are expected to significantly enhance 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 #28, which places it in the top 11% 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. In fact, the industry’s earnings estimates for 2024 and 2025 have jumped 17.5% and 17%, respectively, in the past year.

Before we present the stocks that you may want to watch, 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 53.5% compared with the Zacks Medical sector’s 12.2% growth. The S&P 500 index has increased 36% during this time.

One-Year Price Performance

Here at Zacks, our focus is on the proven Zacks Rank system, which emphasizes earnings estimates and estimate revisions to find great stocks. Nevertheless, we are always paying attention to the latest value, growth, and momentum trends to underscore strong picks.

Of these, perhaps no stock market trend is more popular than value investing, which is a strategy that has proven to be successful in all sorts of market environments. Value investors rely on traditional forms of analysis on key valuation metrics to find stocks that they believe are undervalued, leaving room for profits.

Luckily, Zacks has developed its own Style Scores system in an effort to find stocks with specific traits. Value investors will be interested in the system's "Value" category. Stocks with both "A" grades in the Value category and high Zacks Ranks are among the strongest value stocks on the market right now.

Tenet Healthcare (THC) is a stock many investors are watching right now. THC is currently sporting a Zacks Rank of #1 (Strong Buy) and an A for Value.

THC is also sporting a PEG ratio of 0.74. This popular figure is similar to the widely-used P/E ratio, but the PEG ratio also considers a company's expected EPS growth rate. THC's PEG compares to its industry's average PEG of 1.05. THC's PEG has been as high as 5.07 and as low as 0.68, with a median of 1.45, all within the past year.

Value investors also love the P/S ratio, which is calculated by simply dividing a stock's price with the company's sales. This is a prefered metric because revenue can't really be manipulated, so sales are often a truer performance indicator. THC has a P/S ratio of 0.75. This compares to its industry's average P/S of 0.9.

Finally, investors should note that THC has a P/CF ratio of 4.08. This metric focuses on a firm's operating cash flow and is often used to find stocks that are undervalued based on the strength of their cash outlook. THC's current P/CF looks attractive when compared to its industry's average P/CF of 7. Within the past 12 months, THC's P/CF has been as high as 7.24 and as low as 2.61, with a median of 4.17.

These figures are just a handful of the metrics value investors tend to look at, but they help show that Tenet Healthcare is likely being undervalued right now. Considering this, as well as the strength of its earnings outlook, THC feels like a great value stock at the moment.

Zacks Investment Research