Healthcare Demand is (Cyclically) Improving Ahead of Estimates and Share Prices; Something Has to Give


Estimates for healthcare stocks appear too low in light of improving healthcare demand; this is especially true for healthcare sub-sectors that are highly geared to changes in patient volumes (our favorites being Non-Rx Consumables, Hospitals, and HMOs)

Over the past decade the volume-sensitive healthcare sub-sectors’ revenue patterns have been reasonably well correlated with concurrent indicators of both economic activity (e.g. national employment) and demand for healthcare (e.g. aggregate hours worked in healthcare settings). Employment and healthcare hours worked both are growing off of their recent cyclical troughs, nevertheless revenue estimates imply decelerating growth rates for the remainder of 2012, and a continuation of 2011’s near-historically low rate of revenue growth through 2014

Estimates for the volume-sensitive healthcare groups have remained static since 4Q11 results, even though national employment and aggregate healthcare hours have since improved considerably. Valuations for these sub-sectors also have remained static, i.e. neither estimates nor share prices appear to reflect robust evidence of cyclical strengthening in healthcare demand

Accordingly we believe the frequency and magnitude of positive surprises may be higher than normal in 1Q12 earnings results for volume-sensitive healthcare sub-sectors; and, we anticipate steady and substantial positive revisions to full year 2012 and out-year estimates as expectations align more realistically with cyclically improving demand

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