The Zacks Analyst Blog Highlights: HCA Holdings, Acadia Healthcare, Tenet Healthcare, Cigna and Universal Health Services

Jul 18, 2014, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, July 18, 2014 /PRNewswire/ -- announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the of HCA Holdings Inc. (NYSE: HCA-Free Report), Acadia Healthcare Co. Inc. (Nasdaq: ACHC-Free Report), Tenet Healthcare Corp. (NYSE: THC-Free Report), Cigna Corp. (NYSE: CI-Free Report) and Universal Health Services Inc. (NYSE: UHS-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Thursday's Analyst Blog:

Obamacare Plays: 3 Hospital Stocks to Buy

The Patient Protection and Affordable Care Act (PPACA) or the Affordable Care Act (ACA) or "Obamacare" that was enacted in Mar 2010 and was taken as a bitter pill is now unveiling the significance for a systematic healthcare reform in the U.S. So much so that the positive implications of these reforms have started showing up in the financials of hospital and healthcare stocks, the latest reflected in that of HCA Holdings Inc. (NYSE: HCA-Free Report).

Obamacare Leads to HCA Holdings' Earnings Beat

HCA Holdings' second-quarter 2014 preliminary operating earnings per share (EPS) of $1.07 per share topped the Zacks Consensus Estimate of 92 cents and the year-ago figure of 91 cents. The upside was driven by year over year growth of 9.2% in total revenues and 2.2% in same-facility-equivalent admissions (inpatient and outpatient volumes). Improved pricing also led to an impressive 5.4% growth in same-facility revenue per equivalent admission. Meanwhile, EBITDA shot up 18.4% to $2.0 billion.

Outlook Strong: HCA Holdings further raised its operating EPS projection to $4.00–4.25 in 2014, from the prior range of $3.45–3.75. Even the top line is now expected to be within $36.0–36.5 billion from the prior estimate of $35.5–36.5 billion. Adjusted EBITDA estimate moved north to $7.0–7.15 billion from prior band of $6.60–6.85 billion in 2014.

The company also received $142 million under the Texas Medicaid Waiver Program (Medicaid revenues). Such benefits are likely to continue in the future. Along with the core growth from higher hospital admissions as a result of Obamacare, HCA Holdings' participation in Medicaid expansion in Texas and Florida will act as major growth catalysts in 2015 as well.

This Zacks Rank #3 (Hold) stock has gained 29.2% year to date, while a significant 10.5% surge was witnessed following the announcement of raised guidance and higher second-quarter 2014 results yesterday. This also compares favorably with S&P 500 healthcare index that generated a year to date return of 10.8%.

Ironing Out Challenges of ACA Reforms

After all the opposition and lobbying to annul the law, the multi-year implementation of ACA is finally reflected in positive signs from healthcare providers (in the form of improved earnings), consumers (higher enrolments) and the market (wider coverage at lower healthcare spending). This paves the way for affordable healthcare facilities and expanded coverage for patients with pre-existing health conditions, while also bringing about 32 million uninsured citizens under the coverage umbrella.

Additionally, the ACA aims to invest in information technology and state-based exchanges to curb any fraud and manhandling of policies, hence offering a complete authentic health insurance coverage in the long run.

Since the multi-phased implementation, some of the most-challenged provisions of ACA have been managed fairly well. These mandates include medical-loss ratio requirements, expanded coverage, non-denial of coverage due to pre-existing conditions and annual rate evaluation, among others. The better-than-expected results are also evident from over 8.0 million of online exchange coverage witnessed in the first phase of enrolments as well as increasing number of youth (under 35 years of age) signing up, thereby leading to a favorable mix in coverage.

The U.S. bears highest health expenditures in the world (about 18% of its GDP). The Centers for Medicare and Medicaid Services (CMS) further expects this to rise to about 20% of GDP by 2022, thereby anticipating a sea-change in the dynamics of the healthcare industry over the next few years.

What This Means for Hospitals?

The ACA is making the consumers stronger and the hospital industry can no longer cherry-pick their customers. Additionally, the hospitals are acclimatizing to payment reductions and wild price discriminations due to government insurance programs like the Medicare, Medicaid and online insurance exchanges.

Having said that, the hospitals like never before are keener to join forces with doctors and insurers for healthy competition and serve their customers better, which will translate into higher admissions. Alongside, the reduction witnessed in uninsured patients owing to ACA are also expected to drive revenue-per-admission and bottom line for hospitals going forward, while also increasing protection and lowering cost of the patients.

Meanwhile, higher enrollments will also likely propel growth in demand for healthcare services, whereby the insureds are expected to increase by about 12 million this year. This will further drive the over-$3 trillion healthcare industry. As well, the reforms under ACA will go a long way toward reducing bad debt problems associated with hospitals.

Investors' Picks

The bullish sentiment in the hospital stocks, ahead of their earnings, is largely attributable to the recent positive response from the implementation of Obamacare provisions. Additionally, the one-year return of 22.7% clocked by S&P 500 healthcare index reflects a progressive trend going forward.

Furthermore, the 'medical hospitals' holds a Zacks Industry Rank #30. This reflects a favorable position of the healthcare industry among the 260+ Zacks industry groups.

Here are 3 stocks that can potentially outperform the broader market in the upcoming quarters:

Acadia Healthcare Co. Inc. (Nasdaq: ACHC-Free Report): This Zacks Rank #1 (Strong Buy) stock recorded a one-year return of 31.5% and was all green following HCA Holdings' latest earnings results. Acadia Healthcare also delivered positive earnings streak in two of the last four quarters with an average beat of 7.6%, while it broke even in the last two quarters.

Acadia Healthcare has acquired about 1,700 beds from the spree of seven acquisitions executed in the past 15 months. The latest acquisition of Partnerships in Care (PiC) last month alone added 1,200 beds, thereby appreciating inpatient volumes. The addition of PiC also impelled an earnings accretion of 17–18 cents per share, before expenses. Management now expects EPS of $1.44–1.46 in 2014, up from prior estimate of $1.26–1.29.

The acquired and the organic bed expansion along with smooth execution of the ACA policies are expected to drive meaningful growth for the company going forward, as reflected by enhanced EBITDA margin in first-quarter 2014. Although higher debt remains a concern, steadily improving cash flows are likely to support leverage.

An optimistic growth outlook is also underscored by upward earnings estimate revisions for Acadia Healthcare in the last 90 days. The Zacks Consensus Estimate for 2014 and 2015 rose 8.3% and 18.1% to $1.44 and $1.96 per share, respectively, during the same period.

Acadia Healthcare is slated to release its second-quarter results after the closing bell on Jul 29.The Zacks Consensus Estimate for the quarter is pegged at 31 cents a share.

Tenet Healthcare Corp. (NYSE: THC-Free Report): This Zacks Rank #2 (Buy) stock has delivered positive earnings surprises in three of the last four quarters with an average beat of 14.7%. The company has gained 17.2% year to date, while Obamacare-effect and improved prelims of HCA Holdings drove the stock price by 8.3% yesterday.

Tenet Healthcare continues to enhance core growth and optimize its capital structure through financial and strategic plans. Despite the Medicare related rate cuts, the company has benefited from coverage expansion in the first quarter of 2014 along with 2.1% growth in inpatient revenues.

Furthermore, the company is actively consolidating its market position through strategic acquisitions and multi-year alliances with other leading healthcare providers such as Cigna Corp. (NYSE: CI-Free Report), Blue Cross and Blue Shield of Illinois (BCBSI),and othersacross the U.S. The company identified $100–200 million of synergies from the VHS acquisition (of which $50–100 million is expected to be captured in 2014) which is likely to exceed in the long run. These efforts are driving outpatient revenues and asset-base.

Per the estimates published by the Congressional Budget Office (projecting a 23% reduction in uninsured individuals nationwide in 2014) the company estimates a 15% decline in its uninsured volumes, which should contribute about $75 million to EBITDA in 2014.

Based on these positives, Tenet Healthcare has witnessed upward estimate revisions over the last 60 days. The estimates for 2014 and 2015 have moved north by 3 cents and 6 cents a share to $1.28 and $2.59 per share, respectively, during this period.

Moreover, the Most Accurate estimate for Tenet Healthcare's 2014 and 2015 earnings currently stand at $1.45 and $2.97 a share, resulting in an Earnings ESP of +13.28% and +14.7%, respectively. This indicates likely earnings beat for this year and the next.

Tenet Healthcare is slated to release its second-quarter results after the closing bell on Aug 4, with a Zacks Consensus Estimate of break-even earnings.

Universal Health Services Inc. (NYSE: UHS-Free Report): This is another Zacks Rank #2 stock that followed the rising trend from HCA Holdings' results, and delivered positive earnings surprises in three of the last four quarters with an average beat of 14.7%.

Universal Health has gained about 21% year to date and 5.6% yesterday. This dividend-paying hospital company has an attractive core business model, which focuses on regional expansion across the U.S. and Puerto Rico through meaningful acquisitions. The latest acquisition of Psychiatric Institute of Washington, in Apr 2014, strengthened its position with the addition of about 190 beds in the region.

The benefits from core growth and healthcare reforms are also evident from the company's improved EBITDA, asset-base and operating cash flows. Alongside, reduction in debt and controlled capital expenditure are likely to boost margins in the upcoming quarters.  Debt-to-EBITDA improved to 2.39x at Mar 2014-end from 3.02x at 2013-end.

Universal Health has witnessed upward estimate revisions over the last 90 days. The estimates for 2014 and 2015 have moved north by 11 cents and 6 cents a share to $5.14 and $5.75 per share, respectively, during this period.

United Health is slated to release its second-quarter results after the closing bell on Jul 24. The Zacks Consensus Estimate for the quarter is pegged at $1.15 a share.

What Lies Ahead?

As the year 2014 remains the performance period for the measures under ACA, more challenges have yet to implement their remaining provisions. However, in the long run, we believe that the reforms will likely streamline the delivery of healthcare system in the U.S., and simultaneously reduce future deficits and Medicare spending. Subsequently, more undervalued healthcare stocks with improving fundamentals will possibly gain strength in the future.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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