Near-Term Outlook Tepid for Medical Services Industry

Urmimala Biswas
·7-min read

The Zacks Medical Services industry comprises third-party service providers and caregivers appointed by core healthcare companies for economies of scale. The industry includes pharmacy benefit managers, contract research organizations (CRO), mobile and wireless medical technology companies, third-party testing labs, surgical facility providers, and healthcare workforce solutions providers among others.

Over the past few years, the healthcare industry has strategically moved from volume- to value-based care. This changing pattern of care calls for efficient and better-quality facilities, thus gradually increasing the need to appoint specialized external service providers.

In recent times, biotechnology and pharmaceutical companies have often been seen outsourcing clinical development and data-solution services to improve quality of medical care at competitive costs. With growing importance of effective healthcare management, the medical service industry has become an integral part of the modern healthcare mechanism.

Here are the industry’s four major themes:

  • The coronavirus-led worldwide sales disruption has had a mixed impact on the medical services industry so far. On the one hand, like the other domains within the healthcare space, this industry too is suffering from the imposition of the widespread stay-at-home orders. Although, through the second quarter, this order has been relaxed in many of the states, with the resurgence of COVID-19 cases, patients are deferring their non-essential and elective procedures, and avoiding hospital stay. This is affecting many medical services companies, pulling down their revenues. On the other hand, this sector is witnessing growing demand for telemedicine-focused online medical services. Since the pandemic begun, telemedicine companies in particular have been doing well. In February, the Centers for Disease Control and Prevention asked healthcare service communities to increase the use of telemedicine. Added to this, the House recently passed an emergency spending bill, allowing Medicare reimbursement for telehealth during crisis. Apart from this, a few molecular diagnostics service providers have been doing well amid COVID-19-induced economic downfall. These stocks have either received or are in process to receive the Emergency Use Authorization (EUA) by the FDA for their SARS-CoV-2 diagnostic tests.

  • With a significant reduction in regulatory and tax burden on U.S. healthcare companies, the space is finally making progress in terms of technology adoption. This is creating opportunities for mobile and wireless medical technology companies. This apart, treatments are becoming less invasive with shorter recovery times, thanks to the specialized skills and advanced techniques of surgical facility providers. In the future, concepts like ‘bed less hospitals’ are expected to gain popularity. Currently, third-party laboratory testing providers and contract research organizations are also seeing a surge in demand, owing to the growing need for complex tests, services and clinical research.

  • For the conventional biotechnology and pharmaceutical firms, clinical trials account for the majority of their drug development costs. These firms are right now looking to outsource clinical trials to control escalating costs related to therapeutic complexities, regulatory demands and timelines. Going by a report published in Contract Pharma, outsourcing to CROs is anticipated to witness a 7.4% CAGR through 2019, with a market penetration rate of 72% by 2020. Overall, the global market for clinical trial services is forecast to grow 12% year on year in 2021 (The Business Research Company).

  • With rising cognizance about the benefits of specialized medical caregiving, the need for healthcare workforce/staffing service providers has increased significantly. For example, the demand for nurses has increased manifold and is expected to be high in the days ahead. Going by a study published by Georgetown University, the economy will create 1.6 million job openings for nurses through 2020. 

Zacks Industry Rank Indicates Weak Prospects

The Zacks Medical Services industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #157, which places it in the bottom 38% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Lags S&P 500, Outperforms Sector

The Medical Services Industry has outperformed its own sector but underperformed the S&P 500 over the past year. The stocks in this industry have collectively gained 13% during the said time frame compared with the S&P 500 composite’s rise of 13.5% and the Medical Sector’s 8.5% rise.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing medical stocks, the industry is currently trading at 39.80X compared with the S&P 500’s 22.69X and the sector’s 34.08X.

Price-to-Earnings Forward Twelve Months (F12M)


Over the last five years, the industry has traded as high as 45.17X, as low as 24.85X, and at the median of 31.13X, as the charts below show.

Price-to-Earnings Forward Twelve Months (F12M)

Bottom Line

Over the past five years, the third-party medical services industry has expanded rapidly, creating huge scope for companies within this niche as well as for those in the broader healthcare value chain. This industry is gaining prominence on an increase in the number of healthcare applications and services that can help core healthcare companies run their operations in an optimal way.

However, third-party medical service providers face issues related to a tough capital spending environment. Also, smaller biotechnology companies, which are customers of these medical service companies, depend on the credit and capital markets. Given the ongoing unfavorable economic conditions, many of these are currently unable to properly access credit or equity funding. This is gradually reducing demand for third-party service providers.

Below are four stocks within the Medical Services industry that have been witnessing positive earnings estimate revisions and carry a Zacks Rank #1 (Strong Buy) or #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Medpace Holdings, Inc. (MEDP): This is a global, full-service clinical contract CRO providing Phase I-IV clinical development services to the biotechnology, pharmaceutical and medical device industries.

Price and Consensus: MEDP

The company currently sports a Zacks Rank of 1. The Zacks Consensus Estimate for 2020 earnings indicates a year-over-year surge of 30.1%. The company delivered earnings surprise of 18.5%, on average, in the trailing four quarters.

AMN Healthcare Services, Inc. (AMN): This is a medical services company providing access to a comprehensive network of quality healthcare professionals through its innovative recruitment strategies and breadth of career opportunities.

Price and Consensus: AMN

The company holds a Zacks Rank of 2, at present. The Zacks Consensus Estimate for 2021 earnings indicates year-over-year growth of 12.4%. The company has a historical five-year earnings growth rate of 25%.

LHC Group, Inc. (LHCG): This is a national provider of in-home healthcare services and innovations, providing value-based healthcare to patients primarily within their home or place of residence.

Price and Consensus: LHCG

Currently, the company carries a Zacks Rank of 2. The Zacks Consensus Estimate for 2021 earnings suggests a year-over-year jump of 27.8%. The company has a historical five-year earnings growth rate of 23.3%.

Surgery Partners, Inc. (SGRY): This healthcare services company has a differentiated outpatient delivery model focused on providing advanced, cost effective solutions for surgical and related ancillary care in support of both patients and physicians.

Price and Consensus: SGRY

The company holds a Zacks Rank of 2, at present. The Zacks Consensus Estimate for 2021 earnings indicates year-over-year growth of 25.6%. The company delivered earnings surprise of 7.7%, on average, in the trailing four quarters.

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