Is There a Cyclical Rebound in US Healthcare Demand? Evidence to Date from 1Q12 Results

The link between quarterly reports and underlying healthcare demand is remarkably noisy and signals from 1Q12 results thus far are mixed; however on net we see convincing evidence of strengthening US healthcare demand

With a single exception (HUM) commercial payors saw rising 1Q12 utilization; Hospitals’ adjusted admissions are accelerating; and, US demand for knees is showing strength across all suppliers

Distributors’ 1Q12 US sales generally accelerated, though a significant portion of this may be due to market share gains by these distributors’ large customers

Dental demand is perhaps the most elastic, thus we tend to view the dental stocks as canaries; Dentsply (XRAY) reported its best rate of internal growth since before the recession, with double-digit US growth offsetting cyclically weak EU demand

Despite these results, and also despite strength in non-disclosure related concurrent indicators of US healthcare demand (e.g. aggregate hours worked in healthcare settings), revenue estimates and share prices for the more volume-sensitive healthcare names imply a multi-year continuation of trailing demand levels, which we’re convinced were cyclical lows

We recommend a pro-cyclical / pro-US tilt to healthcare portfolios; our favorites are Hospitals, Non-Rx Consumables (e.g. BCR, BDX, BAX, COV, HSP, OMI, CFN), and commercial HMOs (e.g. WLP, UNH, CI, AET)