Amid prevailing economic uncertainties, the healthcare sector has showcased extraordinary durability. BlackRock reports indicate that healthcare equities had 23% less volatility than the overall market in the previous year. Long-term growth drivers, such as the rising COVID cases, soaring demand for chronic disease treatment, and an aging global population, ensure constant demand, irrespective of the economic landscape.
Given the industry’s resilience and long-term growth prospects, fundamentally robust medical stocks Select Medical Holdings Corporation (SEM), Fresenius SE & Co. KGaA (FSNUY), and HCA Healthcare, Inc. (HCA) could be solid portfolio additions now.
The healthcare sector is forecasted to sustain strong growth in the ensuing months, driven by the swift spread of COVID-19 variants such as EG.5 (Eris), accounting for nearly 21.5% of infections in the United States. The FL.1.5.1 and XBB.1.16.6 strains follow closely behind, representing 14.5% and 9.2% of cases, respectively.
Despite the World Health Organization's assertion of its marginal public health risk, a surge in infection, hospitalization, and mortality rates has prompted industry leaders to adjust existing vaccines. Presently, there is an average daily hospitalization of approximately 4,304 patients in the United States, with about 15% requiring intensive care.
The term "Tripledemic," referring to the simultaneous winter surges of three distinct respiratory viruses — RSV (respiratory syncytial virus), flu (influenza), and COVID-19 — became prevalent and entered our lives last year.
It infected millions, strained healthcare facilities, and resulted in over 100,000 deaths in the United States during the four-month peak of these viruses in 2022. The "Tripledemic" situation will likely persist into the 2023 winter season, causing further infections and elevating hospital admission rates.
Furthermore, standout technologies are revolutionizing hospital operations by enhancing team interface, improving workflow efficiency, and timely empowering the medical staff with appropriate patient details, paving the way for more informed healthcare delivery.
The global hospital market revenue is expected to reach $4.70 trillion, growing at a 3.6% CAGR by 2027. The U.S. hospital market is expected to grow at a CAGR of 2.7%, resulting in a market volume of $1.60 trillion by 2027.
Given the industry tailwinds, it's time to examine the fundamentals of the top three stocks to watch in the B-rated Medical-Hospitals industry, starting with the third in line.
Stock #3: Select Medical Holdings Corporation (SEM)
SEM operates critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers. It operates through four segments: The Critical Illness Recovery Hospital; The Rehabilitation Hospital; The Outpatient Rehabilitation; and The Concentra.
On August 24, SEM announced that 10 of its inpatient rehabilitation hospitals in 18 locations have been named to Newsweek's 2023 list of America's Best Physical Rehab Centers. The rehabilitation hospitals had achieved the top positions in the national Newsweek rankings for a third consecutive year.
On September 1, the company paid the shareholders a dividend of $0.125 per share paid on September 1. SEM pays an annual dividend of $0.50 per share, translating to a dividend yield of 1.93%. Its four-year average yield is 0.91%.
SEM’s trailing-12-month ROCE, ROTC, and ROTA are 16.93%, 4.59%, and 2.64% compared to the industry averages of negative 42.72%, 22.48%, and 31.32%, respectively.
SEM’s revenue for the fiscal second quarter that ended June 30, 2023, stood at $1.67 billion, up 5.7% year-over-year, while income from operations stood at $159.20 million, up 31.6% from the year-ago quarter.
During the same quarter, net income attributable to SEM and earnings per common share increased 41.5% and 41.9% from the year-ago quarter to $78.24 million and $0.61, respectively. In addition, as of June 30, 2023, its adjusted EBITDA stood at $219.47 million, up 21.3% year-over-year.
Street expects SEM’s revenue and EPS to increase 3.8% and 93.6% year-over-year to $1.63 billion and $0.41, respectively, in the fiscal third quarter (ending September 2023). The company surpassed consensus revenue estimates in three of the trailing four quarters, which is impressive.
SEM’s shares have gained 4.2% year-to-date to close the last trading session at $25.87. Over the past six months, it gained 4.5%.
SEM’s POWR Ratings reflect its positive prospects. The stock has an overall B rating, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a B grade for Growth, Value, Stability, and Sentiment. In the B-rated Medical-Hospitals industry, it is ranked #3 out of the 10 stocks.
To see additional POWR Ratings for Quality and Momentum for SEM, click here.
Stock #2: Fresenius SE & Co. KGaA (FSNUY)
Headquartered in Bad Homburg vor der Höhe, Germany, FSNUY, a healthcare company, provides products and services for dialysis, hospitals, and outpatient medical care. It operates through four segments: Fresenius Medical Care; Fresenius Kabi; Fresenius Helios; and Fresenius Vamed.
Recently, the company signed an agreement with Virginia Oncology Associates (VOA) under which VOA will purchase the Ivenix Infusion System to deliver medications for its patients using VOA’s electronic medical record (EMR) system. VOA specializes in treating people with cancer and blood disorders and is part of the national U.S. Oncology network.
Last month, the rating agency Fitch revised the outlook of FSNUY from negative to stable. The rating was affirmed at BBB-. The improved outlook is based on the consistent performance of the Operating Companies, prudent capital allocation, and progress on the group simplification, amongst others. The revised outlook is a strong testament to the successful execution of the strategy toward #FutureFresenius.
FSNUY’s annual dividend of $0.25 per share translates to a 3.11% yield on the current price level. FSNUY’s dividend payments have grown at a CAGR of 18.4% and 7.5% over the past three and five years, respectively. Its four-year average dividend yield is 2.55%.
FSNUY’s trailing-12-month cash from operations is $4.85 billion compared to the industry average of negative $19.29 million. Also, its trailing-12-month EBIT and levered FCF margins of 7.08% and 6.58% are significantly higher than the industry averages of 0.35% and 0.26%, respectively.
During the fiscal second quarter that ended June 30, 2023, FSNUY’s revenue stood at €10.36 billion ($11.12 billion), up 3.4% year-over-year, while its gross profit came at €2.33 billion ($2.50 billion).
Net income attributable to FSNUY and earnings per ordinary share stood at €375 million ($4.02 million) and €0.15, respectively. As of June 30, 2023, its total current assets came at €19.31 billion ($20.72 billion), compared to €18.28 billion ($19.62 billion) as of December 31, 2022.
FSNUY’s revenue for the fiscal third quarter ending September 2023 is expected to come at $11.41 billion, up 10.4% year-over-year. For the fiscal year ending December 2023, Street expects its revenue to increase 3.7% year-over-year to $45.03 billion.
The stock gained 13.1% over the past three months to close its last trading session at $7.96. Over the past six months, the stock gained 27.4%.
FSNUY’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
FSNUY has an A grade for Stability and a B for Value. Within the same industry, it is ranked #2.
Beyond what we’ve stated above, we have also rated the stock for Growth, Momentum, Sentiment, and Quality. Get all ratings of FSNUY here.
Stock #1: HCA Healthcare, Inc. (HCA)
HCA provides health care services operating general and acute care hospitals that offer medical and surgical services, including inpatient care, intensive care, cardiac care, diagnostic, and emergency services; and outpatient services, such as outpatient surgery, laboratory, radiology, etc.
On August 29, HCA announced a groundbreaking collaboration with Google Cloud to utilize generative AI technology to enhance workflow efficiency across time-intensive operations like clinical documentation. The strategic move will enable physicians and nurses to dedicate greater attention to patient care, indicating positive prospects for HCA.
On July 27, 2023, HCA’s board of directors declared a quarterly dividend of $0.60 per share on the company’s common stock, payable to the stockholders on September 29.
HCA’s annual dividend of $2.40 per share translates to a 0.94% yield on the current price level. ABBV’s dividend payments have grown at a CAGR of 41.7% and 17.6% over the past three and five years, respectively. Its four-year average dividend yield is 0.83%.
Its trailing-12-month EBIT and levered FCF margins of 15% and 5.71% are significantly higher than the industry averages of 0.35% and 0.26%, respectively. Also, its trailing-12-month cash from operations is $9.83 billion compared to the industry average of negative 19.29 million.
During the fiscal second quarter that ended June 30, 2023, HCA’s revenues stood at $15.86 billion, up 7.1% year-over-year. Revenue per Equivalent Admission grew 2.9% from the year-ago quarter. In addition, its adjusted EBITDA stood at $3.06 billion, up marginally from the prior-year quarter.
Net income attributable to HCA and earnings per share amounted to $1.19 billion and $4.29, up 3.3% and 10% year-over-year, respectively. As of June 30, 2023, its current assets stood at $13.89 billion, compared to $13.64 billion as of December 31, 2022.
For the fiscal year 2023, the company expects its revenue to come between $63.25 billion and $64.75 billion, while its adjusted EBITDA is expected to come between $12.3 billion and $12.8 billion. Also, net income attributable to HCA is expected to come in the range of $4.9 billion and $5.255 billion.
HCA’s revenue and EPS for the fiscal third quarter ending September 2023 are expected to come at $15.85 billion and $4.07, up 5.9% and 3.5% year-over-year, respectively. The company surpassed consensus EPS estimates in three of the trailing four quarters.
The stock gained 6.8% year-to-date to close its last trading session at $256.28. Over the past year, the stock gained 22.2%.
HCA’s robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
HCA has a B grade for Value, Sentiment, and Stability. It is ranked first within the same industry.
Click here for the additional POWR Ratings for HCA (Growth, Momentum, and Quality).
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HCA shares were trading at $255.89 per share on Monday afternoon, down $0.39 (-0.15%). Year-to-date, HCA has gained 7.37%, versus a 17.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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