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LLC Healthcare Stocks Picks (Mizuho Securities USA analysts)

Encompass Health Corp (EHC)

Recommendation Buy TP $90.00

Encompass Health Corporation provides facility-based and home-based post-acute healthcare services. The company operates through two segments, Inpatient Rehabilitation, and Home Health and Hospice. The Inpatient Rehabilitation segment provides specialized rehabilitative treatment on an inpatient and outpatient basis to patients who are recovering from conditions, such as stroke and other neurological disorders, cardiac and pulmonary conditions, brain and spinal cord injuries, complex orthopedic conditions, and amputations. The Home Health and Hospice segment offers home health services, which include a range of Medicare-certified home nursing services to adult patients, such as skilled nursing, physical, occupational, and speech therapy, as well as medical social work and home health aide services; and hospice services, including in-home services to terminally ill patients and their families, such as pain control and symptom management, as well as provides emotional and spiritual support. As of March 18, 2020, Encompass Health Corporation operated 134 hospitals, 245 home health locations, and 83 hospice locations in 37 states and Puerto Rico.

EHC's ten, five, and two-year EV/EBITDA trading average are 9.2x, 9.6x and 10.5x, respectively. Mizuho Securities USA analysts’ valuation of $90 is a blended price target using an average of EV/EBITDA based price target, P/E based price target and free cash flow price target. Blending these approaches yields the price target, with a blended valuation multiple of 13.3x 2020E MSUSA EBITDA and 12.6x EHC definition of adjusted EBITDA, in-line with historical trading averages for post-acute facility-based companies. Given that Mizuho Securities USA analysts view guidance as conservative coupled with consistent earnings beat and raises, they believe EHC will trade at the high-end of post-acute EV/EBITDA multiple range.

Risks to valuation include, but are not limited to, cuts in reimbursement from private payers and the government, competition, government investigations and litigation, increasing costs (including but not limited to labor costs), increased government regulation and investigations, and potential bundling of payments and a prolonged negative impact from COVID-19.

$EHC, Encompass Health Corporation / H1

Humana Inc. (HUM)

Recommendation Buy TP $420.00

Humana Inc., together with its subsidiaries, operates as a health and well-being company in the United States. It operates through Retail, Group and Specialty, and Healthcare Services segments. The company offers medical and supplemental benefit plans to individuals. It also has contract with Centers for Medicare and Medicaid Services to administer the Limited Income Newly Eligible Transition prescription drug plan program; and contracts with various states to provide Medicaid, dual eligible, and long-term support services benefits. In addition, the company provides commercial fully-insured medical and specialty health insurance benefits comprising dental, vision, and other supplemental health benefits; financial protection products; and administrative services only products to individuals and employer groups, as well as military services, such as TRICARE South Region contract. Further, it offers pharmacy solutions, provider services, predictive modeling and informatics services, and clinical care services, such as home health and other services to its health plan members, as well as to third parties. As of December 31, 2019, the company had approximately 17 million members in medical benefit plans, as well as approximately 5 million members in specialty products.

Mizuho Securities USA analysts’ valuation of $420 is based on a blended average of P/E, EV/EBITDA and free cash flow/enterprise yield price targets. Their P/E approach yields a $346 price target based on 18.7x 2020E adjusted EPS, in line with the company’s five-year trading average. Their EV/EBITDA approach yields a $329 price target based on 11.2x 2020E adjusted EBITDA, in line with the company’s five-year trading averages. For cash flow/enterprise approach, Mizuho Securities USA analysts use a 5% yield of a free cash flow to enterprise value, yielding a $587 price target, in-line with the company’s two-year trading average.

Blending the approaches yields their $420 price target, which implies a valuation multiple of 22.7x 2020E adjusted EPS and 14.1x 2020E adjusted EBITDA. Risks include legislative risk, an economic downturn, changes to government reimbursement, loss of market share in Medicare Advantage due to increased competition, competitive pricing environment and an inability to meet state insurance capital requirements and a prolonged negative impact from COVID-19.

$HUM, Humana Inc. / H1

Laboratory Corp. of America Holdings (LH)

Recommendation Buy TP $186.00

Laboratory Corporation of America Holdings operates as an independent clinical laboratory company worldwide. It operates in two segments, LabCorp Diagnostics (LCD) and Covance Drug Development. It offers various clinical laboratory tests, such as blood chemistry analyses, urinalyses, blood cell counts, thyroid tests, Pap tests, hemoglobin A1C and vitamin D products, prostate-specific antigens, tests for sexually-transmitted diseases, hepatitis C tests, microbiology cultures and procedures, and alcohol and other substance-abuse tests. The company also provides testing services in the areas of women's health, allergy, diagnostic genetics, cardiovascular and infectious disease, endocrinology, oncology, coagulation, pharmacogenetics, toxicology, and medical drug monitoring; and esoteric testing, cancer diagnostics, and other procedures. In addition, it provides a suite of applications to enable patients, healthcare providers, health systems, accountable care organizations, and insurers with access to LCD's data and services, as well as billing for laboratory services. Further, it offers end-to-end drug development, medical device, and diagnostic development solutions from research to clinical development and commercial market access. The company primarily serves managed care organizations, biopharmaceutical companies, physicians and other healthcare providers, hospitals and health systems, governmental agencies, employers, patients and consumers, contract research organizations, academic institutions, and independent clinical laboratories. Laboratory Corporation of America Holdings has collaborations with the Boston University, Columbia University, Duke University, Johns Hopkins University, The Mount Sinai Hospital, the University of Tennessee, Yale University, and QIAGEN N.V; and Ciox Health for the creation of COVID-19 patient data registry in the United States.

LH's ten, five and two year P/E trading averages are 13.8x, 14.3x and 14.2x, respectively. Mizuho Securities USA analysts’ valuation of $186 is based on a blended approach of PE, EV/EBITDA and free cash flow/enterprise, which yields an implied target valuation of 14.3x LH's 2021E adjusted EPS, in line with LH's five-year trading average for the clinical labs. Risks to valuation include a prolonged negative impact from COVID-19, more market share loss in the UNH and other managed care contract businesses, the competitive CRO landscape, integration issues with recent acquisitions, physician in-sourcing of lab testing, changes to pricing from government and private payers, introduction of Medicare co-payments and deductibles for laboratory services, continued weak testing volumes, competition and increased government regulation.

$LH, Laboratory Corporation of America Holdings / H1

Tenet Healthcare Corp. (THC)

Recommendation Buy TP $32.00

Tenet Healthcare Corporation operates as a diversified healthcare services company. The company operates through three segments: Hospital Operations and Other, Ambulatory Care, and Conifer. Its general hospitals offer acute care services, operating and recovery rooms, radiology and respiratory therapy services, clinical laboratories, and pharmacies. The company also provides intensive and critical care, and coronary care units; cardiovascular, digestive disease, neurosciences, musculoskeletal, and obstetrics services; outpatient services, including physical therapy; cardiothoracic surgery, complex spinal surgery, neonatal intensive care, and neurosurgery services; quaternary care services in heart and kidney transplants; and limb-salvaging vascular procedures, acute level 1 trauma services, intravascular stroke care, minimally invasive cardiac valve replacement, imaging technology, and telemedicine access for various medical specialties. In addition, it operates ambulatory surgery and urgent care centers, imaging centers, surgical, off-campus emergency, and micro-hospitals; and offers healthcare business process services in the areas of hospital and physician revenue cycle management, as well as value-based care solutions to healthcare systems, individual hospitals, physician practices, self-insured organizations, health plans, and other entities. As of December 31, 2019, the company operated 65 hospitals, 24 surgical hospitals, and approximately 159 outpatient centers, as well as 260 ambulatory surgery, 39 urgent care, and 23 imaging centers in the United States.

THC's ten, five, and two-year trading average of EV/EBITDA were 7.1x, 7.6x and 7.5x. Mizuho Securities USA analysts’ valuation of $32 is based on a blended approach, averaging their FCF/enterprise value, P/E and EV/EBITDA valuation. The blended method yields a valuation target multiple of 7.3x their 2020E adjusted EBITDA minus NCI or 6.6x THC adjusted EBITDA, in line with THC's ten-year trading low. Mizuho Securities USA analysts’ valuation takes into account the company's NOL. Risks to valuation include, but are not limited to, pricing pressure from government and private payers, softer than expected volume growth, economic pressures, competitive pressures and a prolonged negative impact from COVID-19.

$THC, Tenet Healthcare Corporation / H1

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