* All data are as of the close of Wednesday, December 3, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
There's no doubt about it, hospitals are hot. Not only do they nurse people back to health, but over the past several years their stocks have been nursing investment portfolios back to health.
And it's all thanks to one of the biggest shake-ups in political history, President Obama's Patient Protection and Affordable Care Act - which mandates that Americans be enrolled in either a workplace or private healthcare plan or else pay a fine.
According to BenefitsPro, since the PPACA's marketplaces opened at the beginning of 2014 more than 7 million Americans have enrolled in private healthcare plans, which number is expected to surpass 9 million by the time the 2015 open enrollment period closes in mid-February.
Prior to the PPACA's implementation, it was estimated that some 41 million Americans were medically uninsured, according to the Kaiser Family Foundation.
While many of the +9 million private insurance enrollees estimated for 2015 were already receiving coverage through their employers, some 57% of these - more than 5 million - were previously uninsured, according to Kaiser. This brings the previous estimate of 41 million uninsured down to around 36 million, which means there is still plenty of room for growth in the healthcare insurance space.
But hospitals and clinics have been sharing in that growth as well, since five million more healthcare recipients means more visitations, more treatments, more procedures and more demand for healthcare services.
As a result, the stocks of the three largest hospitals companies in the U.S. - HCA Holdings, Inc. (NYSE: HCA), Universal Health Services Inc. (NYSE: UHS), and Community Health Systems, Inc. (NYSE: CYH) - have been soaring as graphed below.
Since March of 2011 (selected as the start date given the public debut of the third largest U.S. hospital company, CYH), where the broader market S&P 500 index [black] has gained 60% and the SPDR Healthcare Sector ETF (NYSE: XLV) [blue] has gained 115%, HCA [beige] and UHS [purple] have beaten both the broader market and healthcare sector with gains of 120% each. The third largest CYH [orange], however, after coming close to matching its peers' performance has recently trended sideways for an overall gain of 16% over its 3.75-year public life.
On an annualized basis, where the S&P has averaged 16% and the XLV has averaged 30.67%, CYH has averaged 4.27%, while HCA and UHS have each averaged 32% per year!
Looking forward, the Hospitals industry looks set to continue its adrenaline injections as more and more Americans sign up for medical insurance and, consequently, use their services.
As tabled below, where green indicates outperformance while yellow denotes underperformance, over the immediate term the industry's earnings are expected to outgrow the broader market's growth rate at some 2.37 to 3.35 times, before settling to a more sustainable 1.74 to 2.19 times over the longer term.
Zooming-in a little closer, the three largest U.S. companies in the space are expected to continue fit as a fiddle, with the once sickly CYH recouping its health faster than its peers, as tabled below.
Straight across the calendar, all three companies are expected to beat the broader market's earnings growth rate (with one tiny exception) by 1.47 to 7.94 times in the near term, before calming to a more sustainable 1.26 to 1.78 times over the next five years - with CYH enjoying that most hyperactive metabolism of them all.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, CYH posted the greatest revenue and earnings growth year-over-year, and by quite an astronomical degree. At the low end of the scale, HCA and UHS split the slowest growth between them, with UHS reporting earnings shrinkage.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, UHS operated with the widest profit margin, HCA enjoyed the widest operating margins, while CYH contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, HCA's management team delivered the greatest returns on assets, where CYH's team delivered the least.
Since HCA's return on equity is not available, the metric does not factor in the comparison.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, HCA provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while CYH's DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, CYH's stock is cheapest relative to forward earnings and 5-year PEG, while UHS' is the most overpriced.
Since HCA's price to company book ratio is not available, the metric does not factor in the comparison.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, CYH offers the highest percentage of earnings over current stock price for all time periods, where UHS offers the lowest percentages over all periods.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, CYH offers the greatest growth in all time periods, while HCA and UHS alternate the slowest growth rates between them.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe CYH's stock offers the greatest upside potential and least downside risk, while UHS' stock offers the least upside and HCA's offers the greatest downside.
It must be noted, however, that all three stocks are already trading below their low targets. While this may mean an increased potential for sharp moves upward, it may warrant reassessments of future expectations.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, UHS is best recommended with 5 strong buys and 12 buys representing a combined 94.45% of its 18 analysts, followed by HCA with 7 strong buy and 13 buy ratings representing 86.95% of its 23 analysts, and lastly by CYH with 6 strong buy and 8 buy recommendations representing 60.87% of its 23 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… CYH with the cleanest bill of corporate health, outperforming in 20 metrics and underperforming in 9 for a net score of +11, followed far behind by HCA, outperforming in 5 metrics and underperforming in 5 for a net score of 0, with sickly UHS suspended in traction, outperforming in 4 metrics and underperforming in 16 for a net score of -12.
Where the Hospitals industry is expected to outperform the S&P broader market substantially this and next quarters, and significantly in 2015 and beyond, the three largest U.S. companies in the space are expected to vastly outgrow the S&P market's average earnings growth rate, with CYH seemingly on steroids.
After taking all company fundamentals into account, Community Health Systems promises to cure investors' financial aches and pains most speedily, given its lowest stock price to forward earnings and 5-year PEG, highest cash and revenue over market cap, highest current ratio, highest trailing earnings and revenue growth, highest EBITDA over market cap, highest future earnings over current stock price in all time periods, highest future earnings growth in all times periods, and best price targets - decisively winning the Hospitals industry competition.
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