A Jefferies & Co. analyst said Thursday that shares of hospital operators should trade higher in the coming months as patient admission volumes stabilize and consolidation continues.
Analyst Arthur Henderson said hospitals will continue to gain more business as the U.S. economy recovers, and merger and acquisition activity should continue at a fast pace. But after 2012 he said the industry's outlook is less clear: Growth in Medicare reimbursement rates could slow down, and it will be bad for hospitals if the individual mandate in the 2010 health care reform law is repealed.
Henderson assigned "Buy" ratings to shares of Health Management Associates Inc., LifePoint Hospitals Inc. and Tenet Healthcare Corp., and placed "Hold" ratings on shares of Community Health Systems Inc., HCA Holdings Inc. and Universal Health Services Inc.
The analyst said there were 77 mergers and acquisitions among hospitals in 2010, making it the busiest year in the last decade. Henderson said that is likely to continue because the industry is very fragmented: The largest hospital system in the country is HCA Holdings Inc., which owns around 5 percent of all the staffed hospital beds in the U.S. The weak economy and the decrease in patient admissions have been particularly damaging to hospitals that were not well run, Henderson said, and that creates an opportunity for the better-run hospitals to buy and turn those hospitals around.
HCA completed its initial public offering in March, raising $3.79 billion. Meanwhile Community Health Systems went public in December with a buyout offer valuing Tenet at $3.3 billion, or $6 per share. The bid was unsolicited, and Tenet is trying to beat back the offer with a "poison pill" measure and has filed a lawsuit that alleges Community Health Systems bilked Medicare.
Henderson set a price target of $9.50 on Tenet stock, implying the shares will rise about 45 percent from their most recent closing price.
In the longer term, Henderson said hospitals will benefit as the U.S. population ages, incidence of chronic diseases rise and medical technology continues to advance. He said all those changes will lead to greater admissions volumes.
In morning trading, Tenet shares rose 6 cents to $6.60. Shares of Universal Health Services fell 70 cents to $46.50, while shares of HCA Holdings were unchanged at $10.34.