Jubak's Journal Recent articles: • From Russia, with love: $60 oil, 4/26/2005 • Bubble lessons to learn -- and to forget, 4/22/2005 • 5 stocks for a possible market bottom, 4/20/2005 More... | Jubak's Journal 5 health care havens A turbulent market often causes investors to turn to drug stocks. But they have problems. Another piece of the health care sector can help. By Jim Jubak Down 191. Up 56. Down 115. Up 206. Down 60. The volatility of the Dow Jones Industrial Average and the stock market as a whole in the last 10 trading days is enough to make an investor's head spin. It's not just hard to figure out where stocks are headed when each day sends a different message, but the big day-to-day changes raise the cost of being on the wrong side of a move. It's one thing to buy when the indexes are down 10 points and something else entirely when they tumble 190 points. At times like these, investors usually seek the safety of big drug stocks because their earnings are safe and predictable and the stocks deliver on their promises even if the economy is about to turn sour. But that sector has its own troubles these days, ranging from massive lawsuits against Merck The other part of health care So where is the "safe money" going these days? To other parts of health care, including managed-care companies, hospital management companies and medical device makers.
Some strong trends, which had been blowing against the sector in recent years, have reversed direction and are now powering the stocks. Acquisitions, a result of consolidation in the sector as weak players were forced out, are starting to pay off for the survivors. Costs are still rising, but at a lower rate thanks to trends in the health care market such as increased co-payments and deductibles that make consumers more aware of their health care spending, and thanks to better cost-control technology at the companies themselves. And after years of grueling price competition, companies are discovering that they can raise prices and premiums and see the increases stick without losing market share. My three picks for my appearance Wednesday on CNBC's "Morning Call" were: Big savings At the same time, operating revenue is projected to grow by 20% in 2005. The growth is coming from acquisitions, increased enrollment and increases in the net premium yield of 8% to 9% after years of price competition. Thanks to that earnings growth, the stock's price-to-earnings ratio of 21.5 on trailing 12-month earnings drops to 18.4 on projected 2005 earnings. Our StockScouter rated the stock a 9 out of a possible 10 on April 28. A down payment Continued cost savings from operations of scale as the company expands the number of hospitals it operates have pushed operating margins to 36% in 2004 from 35.9% in 2003. The stock trades at a P/E ratio of 22.6 on trailing 12-month earnings and at 18.3 on projected 2005 earnings. Our StockScouter rated the stock an 8 on April 27. Solid organic growth But getting that kind of earnings growth out of what is a projected 8% increase in revenue requires solid savings on the cost end. Humana is getting that by using technology to control costs and from changes in the Medicare Modernization Act. The stock's P/E ratio of 18.4 on trailing 12-month earnings drops to 14.9 on projected 2005 earnings. Our StockScouter rated the stock a 5 on April 27. And, of course as always I have two more exclusive picks for CNBC.com on MSN. Exclusive picks Those synergies, plus the usual cost-savings as the companies combine their operations, have led analysts to project earnings growth of 21% in the fiscal year that ends in October, and 30.3% in fiscal 2006, when the company will get the full benefit of the acquisition. The shares trade at a P/E ratio of 27.4 on trailing 12-month earnings and a forward P/E ratio of 21.9 on projected fiscal 2005 earnings. Our StockScouter rated the stock a 7 on April 27. In late March HCA raised its earnings guidance on improving patient volumes, lower patient bad debt, and cost savings. Analysts have raised their 2005 earnings estimates for HCA to $3.16 from $2.83 in the last 90 days. The shares trade at a P/E ratio of 21.2 times trailing 12-month earnings and 17.3 times projected 2005 earnings. Our StockScouter rated the stock an 8 on April 27. Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak didn't own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||
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