BUY rating on HCA Healthcare Inc. (NYSE: HCA), one of the largest hospital companies in the U.S. While the stock has fallen since the start of 2020 amid coronavirus concerns, we believe that it is undervalued at current prices. HCA has outperformed the market since its mid-March low, rising more than 85%, though it has fallen back slightly in recent sessions. Nevertheless, we believe that the company is well prepared to handle the current surge in coronavirus cases. While the spread of COVID-19 has impacted admission rates, HCA has been able to record higher revenue per admission due to increased patient acuity. It has also improved efficiency and lowered costs. In 2021, management expects to report adjusted EBITDA in line with its original 2020 forecast of $10.25-$10.65 billion, though likely with a wider guidance range.
Given the continued aging of the U.S. population, we like HCA’s reach within the healthcare services market and believe that it is well positioned for long-term growth.
The beta on HCA is 1.05.
Management noted that these patients had higher acuity than average and a longer length of stay, resulting in above-average revenue per admission. HCA also suspended elective procedures at more than 100 hospitals in July and August as COVID-19 cases surged in some regions. Given the suspension of elective procedures, the company’s non-COVID patients also had higher-than-normal acuity, with a high proportion of neurology, cardiology, and oncology patients.
In response to the pandemic, HCA has implemented cost-reduction initiatives, suspended its share repurchase program and dividend, and reduced certain planned capital expenditures. It has also identified opportunities to consolidate its call centers and is working to make its lab services more efficient.
On October 26, HCA reported 3Q20 diluted EPS of $1.92, down from $2.23 in 3Q19 and below the consensus estimate of $2.26. The third-quarter results excluded a $0.03 per share gain on the sale of facilities. Results include $822 million. Revenue rose 5% to $13.31 billion, while adjusted EBITDA fell 10% to $2.05 billion. The profit margin, excluding gains and losses on the sale of facilities, fell to 4.9% from 6.1%. The diluted share count declined 1% from the prior-year quarter, to about 343 million shares.
In 2021, it expects to report adjusted EBITDA in line with its original 2020 forecast of $10.25-$10.65 billion, though likely with a wider guidance range. It expects 4%-5% of its 2021 admissions to be related to COVID-19, but is uncertain whether government reimbursement programs for coronavirus care will continue through next year.
EARNINGS & GROWTH ANALYSIS
HCA posted growth in some metrics in 3Q and declines in others. On a reported basis, inpatient revenue per admission and revenue per equivalent admission each rose 15%, but admissions fell 4%, equivalent admissions fell 9%, outpatient surgeries and inpatient surgeries each fell 7%, and emergency room visits fell 20%. On a same-facility basis, inpatient revenue per admission rose 14% and revenue per equivalent admission rose 15%, but admissions fell 4%, equivalent admissions fell 9%, outpatient surgeries fell 6%, inpatient surgeries fell 7%, and emergency room visits fell 20%.
However, we expect improvement in 2021 as the company leverages its initial experience with the pandemic and elective procedures increase.
FINANCIAL STRENGTH & DIVIDEND
Total debt was $32.6 billion, down from $35.2 billion. Operating cash flow was $2.7 billion, up from $2.1 billion.
While HCA has historically paid a dividend, management announced on its 1Q20 earnings call that it would suspend its dividend due to uncertainties related to COVID-19. It expects to reevaluate resumption of the dividend in 2021.
MANAGEMENT & RISKS
Samuel N. Hazen serves as HCA’s CEO. Mr. Hazen assumed the role on January 1, 2019 following the retirement of former chairman and CEO R. Milton Johnson. Mr. Hazen previously served as HCA’s president and COO, and has worked at the company for almost 37 years.
Following Mr. Johnson’s departure from the board, Thomas F Frist III became the company’s chairman. Mr. Frist is the son of HCA founder Thomas Frist, Jr. and has served on the board since 2006.
HCA investors face risks related to the company’s high leverage, with a debt/cap ratio just under 100%. They also face risks related to intense competition, currency headwinds, and regulatory changes in the healthcare industry.
HCA Healthcare (formerly HCA Holdings) is one of the largest hospital companies its largest presence is in Florida and Texas.
HCA shares fell sharply between mid-February and mid-March 2020 during the coronavirus selloff. However, despite a few minor setbacks, the stock has recovered well, significantly outpacing the market since the March low. The shares also achieved a golden cross in September as the 50-day moving average rose above the 200-day, a notably bullish sign.
The company has also taken numerous steps to maintain its financial health, and, despite declines in certain operating metrics, has continued to grow revenue per admission. Our target price of $145 implies a projected 2021 P/E of 13, roughly in line with the peer average, and a potential return of about 14% from current levels.