4 Stocks to Watch Amid a Challenging Outpatient Home Health Industry – December 29, 2022

The pandemic altered the nature and dynamics of the healthcare industry. The Zacks Medical – Outpatient and Home Healthcare industry bore the brunt of lower outpatient clinic visits and struggled to provide quality care with respect to home healthcare due to the risk of exposure to the virus as well as the record level of staffing shortages. The decline in the severity of the pandemic was followed by the mass opening up of the economy. However, risks related to the emergence of several subvariants of Omicron, including XBB and BQ.1.1, loom large over the US MedTech sector. On a positive note, rising reliance on telehealth and artificial intelligence (AI) is likely to help the industry thrive in the near term. Option Care Health, Inc. ,OPCH , Free Report) LifeStance Health Group, Inc. ,LFST , Free Report) Addus HomeCare Corporation ,ADUS , Free Report) and The Pennant Group, Inc. ,PNG , Free Report) are likely to gain from the prospects.

Industry Description

The industry comprises companies that offer ambulatory care in an outpatient setting or at home. These companies use advanced medical technologies for diagnosis, observation, consultation, treatment and rehabilitation services. The industry participants also include operators of HMO medical centers, kidney dialysis centers, freestanding ambulatory surgical units, emergency centers and other outpatient care centers. Some of the companies in this space have been at the forefront of the COVID-19 pandemic response since 2020 by expanding access to laboratory insights to enable people to lead healthier and safer lives through both molecular diagnostic and antibody serology tests, which help in the diagnosis of COVID-19 and the identification of immune response to the virus.

Major Trends Shaping the Future of the Outpatient and Home Healthcare Industry

Cost Effectiveness: The primary advantage of outpatient clinics is cost-effectiveness. Outpatient medical care clinics do not retain patients for long hours (overnight) or charge exorbitantly. Notably, modern-day outpatient clinics offer a broad spectrum of treatment and diagnostic options and even minor surgical procedures. Financial incentives like health plans and government program payment policies supporting services in lower-cost care settings have also been driving outpatient care. In fact, this is the primary reason why middle-class Americans, making up more than 62% of the total population, prefer outpatient clinic visits.

Participating in Alternative Payment Models: It only seems reasonable for outpatient clinics to shift from fee-for-service (FFS) to alternative payment models (APM) with shared savings, risk, bundled payments or population-based payments. With value-based models of care steadily emerging as the future of healthcare, this shift is an ongoing parallel trend. FFS will be crucial to care organizations as a benchmark by which providers can assess alternative payment models. By obtaining the payment schedule from payers and comparing it to the organization’s FFS reimbursements from the same payer, providers can ascertain the APM that would be financially the most advantageous to its operation.

AI’s Dominant Role: AI has been a roaring success in healthcare. It’s no wonder that it has taken the outpatient and home healthcare space by storm. Outpatient companies prefer bots and automated techniques for managing health information. With the help of AI, hospitals have been achieving better outcomes, with patients receiving more efficient and personalized care. The outpatient industry has been generating huge profits from Electronic Health Records, Revenue Cycle Management, eLabs and ePrescriptions.

Increased Dependence on Telehealth: The pandemic resulted in a decline in outpatient clinic visits. Home healthcare providers struggled to offer quality care due to the risk of exposure to the virus. Though the impact of the pandemic has been far-reaching, it has accelerated healthcare innovation. Visits to outpatient clinics have been witnessing a noticeable rebound, with the majority of people being vaccinated. But there are patients who want to be cautious and are resorting to telehealth. Meanwhile, home healthcare can gain from the benefits provided by Medicare (and several other payers) that comprise a broad range of services that can be delivered in a patient’s home, including post-operative and chronic wound care, rehabilitation, and physical therapy. These services serve as lifelines for vulnerable patients, including the Medicare population, who may suffer from complications arising from COVID-19. Furthermore, home healthcare has seen a surge in the utilization of the telehealth platform in response to the pandemic.

A notable trend that has been emerging in this respect is the increasing popularity of the hybrid mode of treatment. As there are certain chronic health conditions, which cannot be identified over a telephone or video call, patients are embracing the hybrid mode of seeking treatments from their physicians in those cases.

Prominent Role of Remote Patient Monitoring: Remote patient monitoring (RPM) has been gradually gaining ground since the pandemic. During that phase, it was difficult to keep a watch on non-COVID patients in the hospital care setting as hospital capacities were brimming with COVID-19 patients. Thus, non-critical patients were increasingly being provided with healthcare in the comfort of their homes while being remotely monitored by their care providers. Even with the gradual return to normalcy, patients are increasingly preferring to be monitored from their homes via RPM devices. This is also boosting home healthcare services as vulnerable patients can be safely and adequately cared for from the home setting instead of hospital settings, where the risk of COVID-19 or other infections persists.

Zacks Industry Rank

The Zacks Medical – Outpatient and Home Healthcare industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #210, which places it in the bottom 15% of nearly 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Before we present a few outpatient home health stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry’s Stock Market Performance

The industry has underperformed both its sector and the Zacks S&P 500 composite in the past year.

The industry has declined 32.2% over this period compared with the S&P 500’s decline of 22.3%. The broader sector has declined 20.9% in the same time frame.

One Year Price Performance


Image Source: Zacks Investment Research

Industry’s Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E), which is commonly used for valuing medical stocks, the industry is currently trading at 26.6X compared with the S&P 500’s 17.1X and the sector’s 22.5X.

Over the last five years, the industry has traded as high as 31.5X and as low as 16.8X, with the median being at 21X, as the charts below show.

Price-to-Earnings Forward Twelve Months (F12M)

Zacks Investment Research
Image Source: Zacks Investment Research

Price-to-Earnings Forward Twelve Months (F12M)

Zacks Investment Research
Image Source: Zacks Investment Research

4 Bankable Outpatient and Home Healthcare Stocks

LifeStance Health Group: LifeStance Health Group is a renowned provider of outpatient mental health care. The company announced its third-quarter 2022 results last month, wherein it registered a solid uptick in its overall revenues. It also recorded a robust improvement in its total clinicians in the reported quarter. Management is currently focusing on continuing its shift to organic growth, investing in strategic initiatives to build scalable infrastructure and driving operating leverage and profitability. LFST carries a Zacks Rank of 3 (Hold). you can see The complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: LFST

Zacks Investment Research
Image Source: Zacks Investment Research

For this Scottsdale, AZ-based company, the Zacks Consensus Estimate for 2022 revenues suggests growth of 26.8%. The same for earnings indicates an increase of 39.1%. The company’s P/B ratio of 1.1 compares favorably with the industry’s 2.1.

Addus HomeCare: Addus HomeCare’s services and operating model address a number of critical needs across the healthcare continuum. In October, the company announced its third-quarter 2022 results, where it registered a solid uptick in its net service revenues. Management confirmed that its personal care revenues (accounting for 74.5% of overall revenue) improved on a same-store basis. For its home health business, Addus HomeCare achieved a robust organic growth rate in new admissions and total volumes on a same-store basis. ADUS carries a Zacks Rank of 3.

Price and Consensus: ADUS

Zacks Investment Research
Image Source: Zacks Investment Research

For this company, the Zacks Consensus Estimate for 2022 revenue suggests growth of 9.9%. The company’s return on equity (ROE) of 8.5% compares favorably with the industry’s 5.8%.

Option Care Health: Option Care Health is a renowned independent provider of home and alternate site infusion services. In October, the company announced its third-quarter 2022 results, where it registered a solid uptick in its net revenues. At the time of the earnings release, Option Care Health confirmed that it has completed the acquisition of Rochester Home Infusion, Inc. OPCH carries a Zacks Rank of 3.

Price and Consensus: OPCH

Zacks Investment Research
Image Source: Zacks Investment Research

For this Bannockburn, IL-based company, the Zacks Consensus Estimate for 2022 revenues suggests growth of 14.6%. The same for earnings indicates an increase of 31.7%. The company’s ROE of 11.8% compares favorably with the industry’s 5.8%.

The Pennant Group: The Pennant Group is the parent company of the Pennant group of affiliated home health, hospice and senior living companies. It reported its third-quarter 2022 results last month, where it witnessed solid improvement in its overall top line. Its Home Health and Hospice Services segment recorded a robust uptick in revenues, whereas the company also recorded strength in its total home health admissions and total Medicare home health admissions. The uptick in total hospice admissions and same-store senior living revenues for the third quarter was also impressive. PNTG carries a Zacks Rank of 3.

Price and Consensus: PNTG

Zacks Investment Research
Image Source: Zacks Investment Research

For this Eagle, ID-based company, the Zacks Consensus Estimate for 2022 revenues suggests growth of 5.5%. The same for earnings indicates an increase of 23.9%. The company’s ROE of 9% compares favorably with the industry’s 5.8%.

,

Leave a Comment