Checking the Fitness of Three Health Care Stocks
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three health care stocks. With transformation efforts, mergers and acquisitions (M&A) and revenue diversification expected to boost the market, should you consider the three stocks of HCA Healthcare Inc. (HCA), Tenet Healthcare Corp. (THC) and Universal Health Services Inc. (UHS)?
Health Care Stocks Recent News
The health care industry is forecast to experience positive growth over the next few years. According to a report by McKinsey & Co., the market is expected to grow, on average, 7% annually from 2024 through 2027.
The report cites several health care segments that should see higher growth. Within the payer system, Medicare Advantage will benefit from the rise in the number of people who qualify for both Medicare and Medicaid and the group business is set for a post-coronavirus-pandemic recovery of margins. Within the health systems segment, site-of-care shifts will boost outpatient care settings such as physician offices and ambulatory surgery centers. Within the health care services and technology segment, software and platforms businesses are expected to produce gains. Within the pharmacy services segment, specialty pharmacy continues to experience rapid growth.
Given that the health care market is expected to rise from $583 billion in 2022 to $819 billion by 2027, companies such as HCA Healthcare, Tenet Healthcare and Universal Health Services may stand to gain from these developing trends.
Grading Health Care Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five fundamental factors that have been shown to produce market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three health care stocks — HCA Healthcare, Tenet Healthcare and Universal Health Services — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Health Care Stocks
What the A+ Stock Grades Reveal
HCA Healthcare Inc. (HCA) is a comprehensive health care services provider. The company owns, manages and operates a wide range of facilities, including hospitals, freestanding surgery centers, diagnostic and imaging centers, radiation and oncology therapy centers, comprehensive rehabilitation and physical therapy centers, physician practices, home health and hospice services, outpatient physical therapy and community-based service providers. Additionally, HCA Healthcare operates outpatient facilities, such as ambulatory surgery centers (ASCs), emergency care centers, urgent care facilities, walk-in clinics and more. The company oversees approximately 186 hospitals, including 178 general acute care hospitals, six behavioral hospitals and two rehabilitation hospitals.
HCA Healthcare has a Momentum Grade of A, based on its Momentum Score of 81. This means that the stock’s momentum has been very strong in terms of its weighted relative price strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weight of 20%. The ranks are 85, 57, 82 and 40, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 4.1%.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades from 1998 through 2019.
The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross income to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
HCA Healthcare has a Quality Grade of A, based on a score of 95, which is very strong. The company ranks strongly in terms of its gross income to assets and F-Score. Its gross income to assets of 101.2% ranks in the 97th percentile among all U.S.-listed stocks, and its F-Score of 8 ranks in the 95th percentile. The F-Score is a number between 0 and 9 that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. HCA Healthcare also has a buyback yield of 4.9%, which is above the sector median of –7.3% and ranks in the 91st percentile.
The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and long-term annualized basis and its ability to consistently generate positive cash from its core operations. The company’s Growth Grade is A, which is very strong. HCA Healthcare has generated positive annual cash from operations in the past five consecutive years and has a five-year annualized sales growth rate of 6.8%.
Tenet Healthcare Corp. (THC) is a diversified health care services company. Its care delivery network includes United Surgical Partners International (USPI), which operates and holds ownership interests in ambulatory surgery centers and surgical hospitals. The company also operates acute care and specialty hospitals, along with other outpatient facilities, including surgical hospitals and ASCs. Tenet operates through two segments: hospital operations and services, and ambulatory care. The hospital operations and services segment encompasses acute care and specialty hospitals, a network of employed physicians, ancillary outpatient facilities, and the revenue cycle management and value-based care services provided to hospitals, health systems, physician practices, employers and other clients. The ambulatory care segment consists of USPI’s ASCs and surgical hospitals.
The company has a Value Grade of A, based on its Value Score of 83, which is deep value. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA).
The company has a price-earnings ratio of 5.7, ranking in the seventh percentile. Its price-to-free-cash-flow ratio is 8.3 and its enterprise-value-to-EBITDA ratio is 6.9, ranking in the 20th and 28th percentiles, respectively. The price-to-sales ratio is 0.72, ranking in the 26th percentile.
Earnings estimate revisions indicate how analysts view a firm’s short-term prospects. Tenet Healthcare has an Earnings Estimate Revisions Grade of B, based on a score of 77, which is positive. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Tenet Healthcare reported a positive earnings surprise of 21.8% for the second quarter of 2024, and in the prior quarter reported a positive earnings surprise of 125.6%. Over the last three months, the consensus earnings estimate for the third quarter of 2024 has increased from $1.671 to $2.318 per share, due to 14 upward revisions. The consensus earnings estimate for full-year 2024 has increased from $8.981 to $10.555 per share, also based on 14 upward revisions.
Tenet Healthcare has a Growth Grade of B, which is strong. The company ranks in the 59th percentile for its five-year annualized sales growth rate of 2.3%.
Universal Health Services Inc. (UHS) is a holding company that operates through its subsidiaries, including its management company. The company is engaged in owning and operating acute care hospitals, outpatient facilities and behavioral health care facilities. Its operations are divided into three segments: acute care hospital services, behavioral health care services and other services. Universal Health Services owns and operates approximately 360 inpatient facilities and 48 outpatient and other facilities across 39 states, Washington, D.C., the U.K. and Puerto Rico. The services provided include general and specialty surgery, internal medicine, obstetrics, emergency care, radiology, oncology, diagnostic care, coronary care, pediatric services, pharmacy services and behavioral health services. The company also offers capital resources and a range of management services to its facilities, including information services, financial management, facilities planning, physician recruitment and public relations.
Universal Health Services has a Quality Grade of A, with a score of 94, which is very strong. The company ranks strongly in terms of its F-Score and its Z-Score, which measures bankruptcy risk. Its F-Score of 7 ranks in the 84th percentile among all U.S.-listed stocks, and its Z-Score of 6.61 ranks in the 73rd percentile. Universal Health Services has a return on assets of 6.7%, above the sector median of –37.8%, and a buyback yield of 4.6%.
Universal Health Services has a Value Grade of B, based on a score of 62, which is good value. The company ranks in the 17th percentile for its shareholder yield and in the 38th percentile for its enterprise-value-to-EBITDA ratio. The company has a shareholder yield of 4.9% and an enterprise-value-to-EBITDA ratio of 8.4. A lower price-to-free-cash-flow ratio is considered better value, and Universal Health Services’ price-to-free-cash-flow ratio of 19.9 is below the sector median of 26.4. The price-to-sales ratio is 1.01, which ranks in the 35th percentile.
The company has a Momentum Grade of A, based on its Momentum Score of 90. This means that the stock’s momentum is very strong in terms of its weighted relative price strength over the last four quarters. The ranks are 92, 71, 76 and 77, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 11.1%.
Universal Health Services has a Growth Grade of A, which is very strong. The company ranks in the 86th percentile with its five-year annualized sales growth rate of 5.8%.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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