Healthcare stocks that struggled last year could be in for some relief. Now that there's less upheaval due to the pandemic, hospitals are resuming more normal operations, and that may mean better financial results -- and potentially better returns for healthcare investors this year.
An encouraging development suggests that brighter days could be ahead for stocks with exposure to hospitals, including Medical Properties Trust (MPW -3.06%) and HCA Healthcare (HCA -0.81%).
Hospital operating margins are improving
A recent report from healthcare management consulting company Kaufman Hall shows that 2022 year-to-date operating margins at hospitals were a negative 0.2% as of November, according to its operating margin index (which looks at a national median). That's not great, but it's a significant improvement from the negative 3.4% for the index last January.
One of the key findings was that labor expenses have been decreasing, which is likely due to less need for temporary staffing now that COVID hospitalizations are much lower than they were a year ago.
US Coronavirus Cases Currently Hospitalized data by YCharts
This is positive news for hospitals and the industry as a whole, and that can lead to more bullishness in healthcare stocks this year.
Could better profitability be on the way for HCA?
One business that has been fighting increasing labor costs is hospital operator HCA Healthcare, which has over 180 hospitals and 2,000 sites of care in the U.S. and U.K. On the company's most recent earnings call in October, management stated that it was investing significantly in its workforce and that the results were leading to better retention, more new hires, and a decline in contract labor expenses.
But that isn't evident in the results just yet because HCA's operating margin has continued its downward trend over the past few years:
HCA Operating Margin (Quarterly) data by YCharts
It could still be a bit early to see the impact of greater investments in staffing on the company's earnings results or it could be a sign that rising labor costs (e.g. wage increases) may have a more prominent effect on HCA's business in the long run.
Either way, this is something investors will want to keep an eye on this year. They'll also want see if there is more of an improvement in operating expenses and margins in future quarters.
Improving hospital profitability also helps Medical Properties Trust
A stock that may have the most to gain from improving financials at hospitals is Medical Properties Trust. Shares of the real estate investment trust (REIT) fell 53% last year (HCA's stock declined by just 7%).
Although Medical Properties' dividend doesn't look to be in danger (the company's financials remain strong, with a payout ratio of 55%), investors may have been preemptively dumping the stock out of fears that in a rising interest rate environment the healthcare-focused REIT may be too risky of a buy, especially with COVID hospitalizations increasing in the early part of last year.
But if COVID cases don't spike and hospitals are generating better margins, then that means they're in a better position to pay rent. And that should lessen the overall risk to Medical Properties, potentially leading to more investors picking up the stock for its attractive yield, which today sits at around 9%.
Should you buy these stocks?
Although there's still some risk here for both of these businesses, they look to be in better positions now that COVID appears to be less of a problem for hospitals.
Shares of HCA Healthcare and Medical Properties are currently trading at 15 and 6 times their earnings, respectively, and they look like relatively cheap investments right now given the average healthcare stock trades at a multiple of 22. Both of these stocks have the potential to be market-beating investments this year and are attractive buys at their current levels.
