Hospital stocks boomed as the Affordable Care Act rolled out in the first half of the decade. However, the future of Obamacare is now up in the air. And hospital stocks aren't faring nearly as well.
There are still some hospital stocks that could be smart picks over the long run, though. Here's why HCA Healthcare (HCA 0.81%), Select Medical Holdings (SEM 1.33%), and Tenet Healthcare (THC 1.03%) stand out as the three best hospital stocks to buy in 2017.
Although HCA Healthcare stock sank in the immediate aftermath of the U.S. election in November, the hospital operator's share price has performed quite well since then. HCA is one of the largest healthcare systems, with its affiliates owning and operating 171 hospitals and 118 freestanding surgery centers spanning 20 states and England.
HCA's first-quarter 2017 revenue increased 3.5% year over year to $10.6 billion, thanks primarily to increased Medicare and private-pay patient revenue. However, the company's earnings slipped 4.2% from the prior-year period to $777 million. Higher salary and benefit costs was a primary factor behind the earnings decline.
Its size gives HCA an advantage in negotiating with supply vendors and with payers that smaller hospital chains don't enjoy. Although the company's debt stands at $31.5 billion, HCA is able to generate enough cash flow to service the debt without too much difficulty.
The stock trades at a little over 10 times expected earnings. That's an attractive valuation, considering that Wall Street projects HCA will grow earnings by nearly 11% annually over the next five years.
Select Medical Holdings
Select Medical Holdings has been one of the best-performing hospital stocks on the market over the last year, although its share price has been quite volatile. The company operates 122 specialty hospitals in 27 states and 1,610 outpatient rehabilitation clinics in 37 states and the District of Columbia. In addition, Concentra, which is operated through a joint venture subsidiary, runs 308 medical centers in 38 states.
The company's first-quarter revenue increased 2.1% year over year to $1.1 billion. Select Medical's net income, however, dropped nearly 61% from the prior-year period to $36.7 million. It's not as bad as it sounds, though. Almost $19 million of the year-over-year change stemmed from a loss on early repayment of debt. Also, the first quarter of 2016 was bolstered by a $25 million one-time non-operating gain.
Select Medical's focus on specialty hospitals and outpatient rehab makes the stock especially appealing. In his 2009 book, The Innovator's Prescription: A Disruptive Solution for Healthcare, Harvard Business School's Clayton Christensen highlighted why specialty hospitals could be critical in improving the U.S. healthcare system. Select Medical is well positioned to benefit if Christensen's healthcare prescription is increasingly adopted.
Analysts think Select Medical will be able to grow earnings by an average annual rate of 15% over the next five years. That kind of growth makes the stock appear to be valued attractively, with shares trading at 14 times expected earnings.
The past year hasn't been a great one for Tenet Healthcare, which operates 80 general acute care hospitals, 20 short-stay surgical hospitals, and around 470 outpatient centers in the U.S, plus nine facilities in the United Kingdom. Shares were beaten down even before the November elections last year. Tenet began a nice rebound only to have disappointing fourth-quarter results in February wipe out much of the stock's gains.
Although Tenet reported declining revenue and a net loss of $53 million in the first quarter of 2017, the news wasn't all bad. The company delivered adjusted EBITDA near the high end of its outlook range. And Tenet's net loss was actually an improvement over the prior-year period.
Perhaps most encouraging for investors considering Tenet stock is that the company has made several good moves that should help turn things around. These moves include reaching a new, multiyear agreement with Humana to add all of Tenet's facilities back into the large health insurer's network. Tenet also sold the majority of its home health and hospice businesses and its managed Medicaid plan in Arizona.
Tenet stock currently trades at less than 11 times expected earnings. That's inexpensive, especially when the hospital operator's projected average annual earnings growth of 20% over the next five years is factored in.