Hospital Stocks Set for Good, Not Great, 2013

by Dan Burrows | December 28, 2012 12:27 pm

Hospital stocks had a healthy run in 2012 — especially after President Obama’s reelection kept healthcare reform alive and well. But that doesn’t mean they can keep it up in 2013.

The president’s expansion of healthcare extends insurance to another 30 million Americans. That means hospitals will have more customers — er, patients — and that more of them will pay their bills.

That has hospital stocks booming. HCA Holdings (NYSE:HCA[1]), the nation’s biggest hospital operator, rallied 39% in 2012. Community Health Systems (NYSE:CYH[2]) is up 73%, Tenet Healthcare (NYSE:THC[3]) added 55%, and Health Management Associates (NYSE:HMA[4]) tacked on 23%.

By comparison, the broader market is up a bit more than 12% in 2012.

It’s usually hard for high-flying stocks to maintain such momentum[5], especially when the trade — predicated on healthcare reform — is no secret. That suggests that the easy money has already been made.

It also doesn’t help that the euphoria following Obama’s presidential victory has been supplanted by anxiety over the so-called fiscal cliff — and the very real possibility that cuts could be coming to Medicare spending in 2013 as part of any grand bargain.

So, even if the hospital stocks can continue their run, political uncertainty

That said, the great healthcare expansion doesn’t kick in until 2014, meaning the business opportunities for the hospital operators is still far enough in the future that shares could have decent upside ahead. Remember, stocks are forward-looking, so they’re essentially discounting a rush of new patients more than a year out.

Also helping the bull case is that none of these names looks particularly overpriced.

HCA, for example, trades in-line with its own five-year average forward price-to-earnings ratio, according to data from Thomson Reuters Stock Reports. Furthermore, that P/E stands at only a bit over 8. That’s a whopping discount to the broader market, despite HCA having much stronger growth prospects.

Tenet trades at just 11 times forward earnings, also cheaper than the S&P 500, and yet it has a long-term growth forecast of 16%. The market’s own long-term growth forecast is just 9%.

HMA goes for just 10 times forward earnings and has an estimated long-term growth rate of nearly 11%. CYH may be the cheapest of the bunch. Its forward P/E of 7.8 represents a 20% discount to its own five-year average. At the same time, analysts forecast a long-term growth rate of nearly 13%.

It’s significant that even after such huge rallies, these stocks still appear to offer compelling valuations. That’s to say, they still look like bargains. Surely a great deal of that is the market’s way of discounting political risk and the uncertainty of Medicare spending in 2013 and beyond.

It’s hard to believe we’ll see the same sort of 25% to 70% gains next year, but given the tailwinds and reasonable valuations, another year of market-beating performance still seems within reach for the major hospital operators.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

  1. HCA:
  2. CYH:
  3. THC:
  4. HMA:
  5. hard for high-flying stocks to maintain such momentum:

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