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ObamaCare A Boon For Hostpitals

August 19, 2014 | About:
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Gordon Pape

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Contributing editor Glenn Rogers joins us today with some insight into how Obamacare is playing out in the U.S. and how to profit from the controversial new healthcare system. Glenn is a successful businessman, entrepreneur, and investor who has worked in executive positions in both Canada and the U.S. He and his family live in southern California. Over to him.

Glenn Rogers writes:

Canadians take for granted a healthcare system with a single payer and generally uniform services throughout the country. Things are different down here in the U.S. Anyone who has been paying attention is aware of the drama surrounding the Affordable Care Act, better known as Obamacare. For many years and through many presidents and congresses, the United States has searched for a healthcare solution that would move away from the employer paid model that has been in effect here for many years and provide affordable protection to the 45 million or so Americans who had little or no coverage.

There have been plenty of attempts to get something done, most notably during the term of Bill Clinton, but until Barack Obama came to power and briefly enjoyed the control of both the House and the Senate nothing ever happened. Finally, after a lot of intrigue and drama, the Affordable Care Act was passed.

However, that was certainly not the end of the story. Since the Republicans regained control of the House of Representatives there have been over 300 attempts to repeal the law and many legal challenges, some of which are only now working their way through the court system. Also, when it was finally time to roll out the plan last fall, the implementation of the websites was horribly botched. That spurred a lot more conversation about repealing the law. We are not through with all the challenges but the law is now a fact of life and it is unlikely to be repealed regardless of who's controlling the House and Senate after this fall's mid-term election.

The law has already started to create some significant benefits for various players in the healthcare industry. Among the main beneficiaries have been the publicly traded companies that manage hospitals. Before the act was implemented, people who did not have health insurance would head to the local hospital's emergency room and often would ignore the bill for services that followed. Now, when patients go to the hospital they are more likely to be covered. As a result, the hospitals are not only seeing more patients but are helping more patients that pay.

Additionally, the aging baby boomers can be counted upon to use more healthcare services and that will include hospital stays. That, combined with an improving economy with reduced unemployment, will increase the use of the employer supported healthcare plans that already existed. Also, we're beginning to see a wave of consolidation in the industry as improving results encourage CEOs of healthcare companies to try to broaden their footprint and acquire additional facilities while interest rates are low and money is available.

Recently hospital operators have begun to report second-quarter earnings with HCA Holdings (NYSE: HCA) beating profit and revenue forecasts, thanks in large part to the fact that the number of uninsured patients admitted to their hospitals dropped by 48%.

Tenet Healthcare (THC), the third largest for-profit hospital group in the U.S., reported an improved bottom line and said that patient admissions in the second quarter grew at a near record rate. Kindred Healthcare (KND), a Fortune 500 company based in Louisville, Kentucky, said its quarterly income from continuing operations increased to $16.8 million ($0.31 per share, fully diluted, figures in U.S. currency) from $10.4 million ($0.20 per share) in the same period last year.

All three of these are potential buys but the company I want to focus on is LifePoint Hospitals Inc. (LPNT). They reported on July 25 and the results were very strong. Second-quarter earnings of $0.84 per share beat the $0.55 consensus of the 18 analysts that cover the company. Revenues were up 17% over the same period last year and adjusted EBITDA in the second quarter increased 35.8% from the same period a year ago.

For the first half, revenues from continuing operations were up 12.5% from the prior year and income for the same period increased 19.8% year-over-year. The company raised its full-year earnings guidance from $2.70 per share to $3.10 per share. The stock rose as you would expect but we are only now beginning to see the impact of the Affordable Care Act so I predict there will be more growth quarters ahead.

The company operates 54 hospital campuses in 18 states with the total number of beds exceeding 6,000. LifePoint is partnering with Duke University in North Carolina to provide additional healthcare services in that state and the company continues to expand both organically and through acquisitions.

Beyond the stocks mentioned above there are number of ETFs that will give you exposure to the space. First Trust Healthcare AlphaDEX Fund (FXH) and SPDR S&P Health Care Services ETF (XHS) are just two. The advantage of the S&P fund comes by way of its robust exposure to hospital stocks. The ETF allocates almost 31% of its weight to healthcare facilities operators and another 20% to managed health care providers. Some investors may not want to hear it, depending on their personal politics, but Obamacare has made those exposures in XHS all the more beneficial. If you want to go the ETF route, have a close look at the holdings of any healthcare fund you're considering since some have more hospital exposure than others.

All and all, this is a strong sector with a lot of upside potential so I would recommend having exposure to healthcare in general and hospitals in particular.

For those who want to focus on one stock, make it LifePoint. The shares closed on Friday at $73.70.

About the author:

Gordon Pape
GuruFocus - Stock Picks and Market Insight of Gurus

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