A panel of Wall Street analysts told 600 healthcare executives in Nashville Thursday that better days are ahead for investor-owned companies in the sector.
But the swooning stock prices are mostly their own making.
The financial fundamentals of Community Health Systems, Tenet Healthcare Corp. and to a lesser degree, HCA, began to flash warning signs last summer and faltered during the autumn.
Highly leveraged and beginning to show earnings declines, CHS saw its shares fall from a high of $64.04 on June 26 to close the year at $26.53. Tenet's plunge was nearly as precipitous. Its shares reached $60.78 on July 14, only to fall to $30.30 by year-end.
Those numbers have worsened with the market madness that greeted 2016.
But the Wall Street analysts at the Nashville council luncheon said there's a silver lining in the clouds hanging over the equity markets.
Brian Tanquilut, senior vice president of healthcare services equity research at Jefferies & Co., told the crowd that healthcare stocks have been oversold in 2016, and he expects the Dow Jones average to regain its footing and lose only 2% by year end.
More states are expanding Medicaid and enrollment on the insurance exchanges under the Affordable Care Act still has room to grow—both tailwinds for the industry, said panelist Frank Morgan, managing director at RBC Capital Markets.
The big question is whether the exchanges can attract a younger and healthier population that stabilizes that book of business, not only for providers, but insurers currently suffering exchange losses, said Chris Rigg, senior managed care and healthcare services research analyst for Susquehanna International Group.
The panel, which also included Morgan Stanley Vice President of Research Andy Schenker, was moderated by Community Health Systems CEO Wayne Smith, who joked that he enjoyed being the inquisitor for a change, rather than the questioned.
Many healthcare companies have more debt-to-equity than other industries and investors have been punishing such organizations heavily in recent months. “There's an aversion to debt,” Smith said after the session ended.
Speaking about CHS' own recent performance, Smith added: “if you look at our debt ratios compared to everyone else, our debt ratio is a little higher. We've worked with a little higher debt ratio before. But I think that's what our issue is,” he said.
Many investor-owned healthcare companies, both hospital companies and physician-service businesses, have significant ownership by hedge funds that Schenker said are “de-risking.”
But Morgan at RBC said healthcare stocks have been beat up so much that those funds specializing in value stocks, which are lower-priced, higher-risk stocks, are about to start buying healthcare stocks and put a floor under their prices.
"They're close to stepping in,” he said.
Correction:The wording of an earlier version of this blog post quoted Community Health Systems CEO Wayne Smith saying all healthcare organizations were more heavily indebted than other industries. He was referring only to CHS.
