Hospitals Back on Their Feet

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) 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.