State budget crunches and lagging volumes will help make 2011 a challenging year for the hospital sector, according to a Goldman Sachs analyst.
Analyst Shelley Gnall said Wednesday in a research note healthcare volumes slowed last year, as they have for a few years after previous recessions, and she sees no near-term catalyst to push a recovery. She also said there are fewer chances for hospitals to ease top-line pressures after two years of aggressive cost cutting, and state budget pressures present a risk to Medicaid rates.
Medicaid is the state-federal program that covers care for the needy, aged, blind and disabled.
Goldman Sachs kept a "Neutral" view on hospital stocks.
"We expect hospitals will remain discounted and range-bound pending meaningful jobs growth, the key catalyst to drive volumes and earnings growth higher," Gnall wrote. "Meanwhile, (merger and acquisition) potential should limit downside."
The analyst said Community Health Systems Inc. offers the most favorable risk-reward profile. Its markets have relatively low unemployment rates, and an attractive merger-and-acquisition pipeline can support growth. Gnall said that was true regardless of the outcome of Community Health's bid to acquire rival Tenet Healthcare Corp.
Community has offered to buy Tenet in a deal worth about $7.3 billion, including assumed debt. Tenet executives have said the price, which amounts to $6 per share, was too low and "opportunistic" given weak industry stock valuations.
Community Health shares climbed 71 cents to $38.63 in Wednesday afternoon trading while broader trading indexes also rose slightly.