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A Hospital Spending Recovery Should Boost Equipment Stocks

Some favorable trends should be good medicine for medical equipment firms.

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As we've highlighted in Morningstar Healthcare Observer, the medical equipment sector is one of the areas within the health-care space that could see significant upside during the upcoming year, despite these firms not feeling so well from late 2008 through 2009. Over the past year, persistent uncertainty over health-care reform, accentuated by proposed reimbursement reductions to hospitals, exacerbated the capital spending cycle swing that was set in motion by the deteriorating macro-environment and credit constraints.

The economics of for-profit hospitals, which we don't consider overly attractive even in a bourgeoning economy ( Tenet Healthcare (THC)--one of the largest for-profit hospital operators--has an operating margin has averaged a measly 0.5% over the past decade), become downright miserable when unemployment, and a corresponding level of uninsured individuals, rise in the down cycle. When combined with hospitals' existing high leverage and reliance on credit markets for both operating and capital needs, the perfect storm of a recession and a credit crunch pushed many hospital operators to the brink of bankruptcy early in 2009.

Alex Morozov does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.