Despite the uncertain economic conditions, the healthcare sector is expected to perform relatively well. Furthermore, rising competition, as well as technological advancements and adoptions, are expected to boost hospital efficiency. However, not all hospital stocks are worth buying.

While quality hospital stock, Encompass Health Corporation (EHC), could be worth buying, I think it could be wise to avoid LifeStance Health Group, Inc. (LFST) and Cano Health, Inc. (CANO), considering their weak fundamentals.

Smart hospitals are a medical technology revolution that merges several hospital delivery systems and leverages computerized patient records to give individualized treatments.

Real-time patient management systems aid in automating and simplifying patient identification processes, resulting in a higher quality of life. The North America smart hospital market is predicted to grow at a 23% CAGR to reach $21.56 billion by 2023.

According to Statista, hospital revenue is expected to reach $4.08 trillion in 2023. Also, revenue is expected to grow at a 3.6% CAGR, resulting in a market volume of $4.70 trillion by 2027.

Investors’ interest in healthcare stocks is evident from the Vanguard Health Care ETF (VHT) 3.5% returns over the past three months.

However, Inflation, problems with transportation, resource scarcity, and logistics issues are posing supply challenges in the healthcare industry. Between 2019 and 2022, the cost of supplies per hospital patient climbed by 18.5%, while emergency department supplies increased by almost 33%.

Stock to Buy:

Encompass Health Corporation (EHC)

EHC provides post-acute healthcare services in the United States. Its operations are managed by its inpatient rehabilitation department. It is a rehabilitation hospital owner and operator.

EHC’s forward EV/Sales multiple of 2.09% is 45.2% lower than the industry average of 3.82%. Its forward Price/Sales multiple of 1.36 is 69.3% lower than the industry average of 4.43.

EHC’s trailing-12-month EBITDA margin of 33.53% is 355.4% higher than the industry average of 7.36%. Its trailing-12-month CAPEX/Sales of 12.33% is 163.8% higher than the industry average of 4.67%.

For the fiscal first quarter ended March 31, 2023, EHC’s net operating revenue increased 9.5% year-over-year to $1.16 billion. Its adjusted EBITDA increased 17.5% year-over-year to $229 million.

Its net income attributable to common stockholders rose marginally year-over-year to $87.7 million. Additionally, its adjusted EPS increased 31.3% over the prior-year period to $0.88.

The consensus revenue estimate of $4.74 billion for the year ending December 2023 represents a 9% increase year-over-year. Its EPS is expected to grow 12.2% year-over-year to $3.20 for the same period. It surpassed EPS estimates in three of four trailing quarters. EHC’s shares have gained 46.2% over the past year to close the last trading session at $64.44.

EHC’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

EHC has an A grade for Sentiment. It is ranked #6 out of 11 stocks in the B-rated Medical – Hospitals industry. Click here for the additional POWR Ratings for Value, Growth, Momentum, Stability, and Quality for EHC.

Stocks to Avoid:

LifeStance Health Group, Inc. (LFST)

LFST, through its subsidiaries, provides outpatient mental health services. The company offers patients a suite of mental health services, including psychiatric evaluations and treatment, psychological and neuropsychological testing, as well as individual, family, and group therapy.

LFST’s forward EV/EBITDA multiple of 68.82 is 428.3% higher than the industry average of 13.03. Its trailing-12-month Price/Cash Flow multiple of 76.58% is 399.9% higher than the industry average of 15.32%.

LFST’s trailing-12-month EBITDA margins of negative 11.50% compare with the industry average of 3.21%. Also, its trailing-12-month gross profit margin of 27.77% is 50.2% lower than the industry average of 55.78%.

For the fiscal first quarter that ended March 31, 2023, LFST’s adjusted EBITDA declined 19% year-over-year to $10.10 million. Also, its total current assets came in at $212.51 million for the period that ended March 31, 2023, compared to $233.22 million for the period that ended December 31, 2022. Its total assets came in at $2.16 billion, compared to $2.17 billion in the same period.

Street expects LFST’s EPS for the second quarter ending June 2023 to come in at negative $0.09. Over the past six months, the stock has lost 76.4% to close the last trading session at $9.19.

LFST’s poor fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, which equates to a Sell in our proprietary rating system.

It is ranked #9 in the same industry. It has a D grade for Value, Momentum, and Quality. To see additional LFST’s ratings for Growth, Stability, and Sentiment, click here.

Cano Health, Inc. (CANO)

CANO operates as a primary care medical services provider in the United States and Puerto Rico. The company owns and operates medical centers enabled by CanoPanorama, a health management technology-powered platform.

CANO’s forward EV/EBITDA multiple of 22.73 is 74.5% higher than the industry average of 13.03.

CANO’s trailing-12-month gross profit margin of 13.92% is 75% lower than the industry average of 55.78%. Also, its trailing-12-month EBITDA margin of negative 0.46% compare with the industry average of 3.21%.

For the fiscal first quarter that ended March 31, 2023, CANO’s loss from operations came in at $39.53 million, up 245.1% year-over-year. Its net loss and loss per share for the same quarter came in at $60.59 million and $0.12, increased significantly year-over-year, respectively.

CANO’s EPS is expected to remain negative at $0.27 in the fiscal year ending December 2023. It missed EPS estimates in three of four trailing quarters. Over the past year, the stock has declined 83.3% to close the last trading session at $1.16.

CANO’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of F, translating to a Strong Sell in our proprietary rating system.

It also has a D grade for Growth, Momentum, Stability, Sentiment, and Quality. Within the same industry, it is ranked last. Click here to see CANO’s rating for Value.

What To Do Next?

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EHC shares were trading at $64.32 per share on Thursday afternoon, down $0.12 (-0.19%). Year-to-date, EHC has gained 7.85%, versus a 15.59% rise in the benchmark S&P 500 index during the same period.

About the Author: Rashmi Kumari

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions. More...

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