Melissa Davis
Most for-profit hospital companies seem poised to deliver their healthiest performance in years.
After suffering through a painful downturn through much of 2003 and 2004, the hospital industry has tried to mend some of its nastiest problems -- particularly bad debt from the uninsured -- and, in turn, has given investors fresh hope that a full-scale recovery is finally on the way. To be sure, the group kicked off 2005 with a bang, delivering pleasant earnings surprises that have pushed hospital stocks up more than 30% so far this year. Now, however, the sector must carry that momentum forward -- without the help it received earlier from the flu -- to prove its overall health. Credit Suisse First Boston analyst Glen Santangelo believes that at least some of the companies can. "We have a generally favorable view of the sector," Santangelo writes. "Continued improvement on the cost side -- particularly salaries and bad-debt expense -- combined with easy comparisons, gives us confidence in our estimates, with the potential for upside." Although Santangelo recently initiated coverage of the group with a conservative market-weight rating, due primarily to valuation concerns, he points to several individual players as likely winners with still more room to run. Industry giant HCA (HCA Quote - Cramer on HCA - Stock Picks) ranks high among his picks. Even after soaring more than 40% this year, he notes, HCA shares still have yet to reach their average five-year valuation. And he, for one, is convinced that the stock deserves more. "Based on our analysis, the current consensus estimates conservatively anticipate a modest recovery in the operating fundamentals of the company," Santangelo writes. "We believe this conservative outlook has created an attractive risk/reward scenario for investors." Santangelo is looking for HCA to beat full-year profit expectations of $3.17 a share. Thus, he has established a $66 target price for the stock.
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