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Duke Fuqua Desk: Opened new long position in HCA

|Includes:HCA Holdings, Inc. (HCA) — HCA is the largest non-governmental health system in the U.S., with over $30 billion in revenue in 2010.  Headquartered in Nashville, but reaching across 20 states and Great Britain, it operates 164 hospitals and 106 free-standing surgery centers. On March 10, 2011, HCA returned to the public market after 5 years being private and is currently listed on the NYSE.

HCA is attractive for the following reasons:

  1. With the passage of the US Health Reform Bill, it is expected that there will be expanded coverage and reduction of uninsured patients by approximately 32-34 million people.  This will significantly decrease losses by hospitals from “self-pay” patients, which typically lead to high levels of bad debt.
  2. Hospital M&A activity, primarily with large health systems buying smaller hospitals, has been very strong.  With HCA’s size and resources, it is very possible that HCA becomes larger through acquisitions.  HCA may even get involved with Community Health Systems’ bid for Tenet Healthcare, which are both publicly traded hospital companies.
  3. With stimulus funds accelerating the adoption of healthcare technology in provider networks, HCA, like other hospital operators, are likely to benefit greatly from enhanced efficiency in billing, administrative, and clinical processes.
  4. There is a tremendous shift nationally of private practice physicians who are now being employed by hospital systems due to increasing administrative and financial burdens, and payment regulations favoring larger institutions. HCA is likely to benefit from this trend by having a larger and more talented physician network employed by the company.
  5. HCA has a strong presence in the high-reimbursable services of cardiology and orthopedic surgery.

HCA is unattractive for the following reasons:

  1. HCA has approximately $26 billion of debt post offering and its debt exceeds its assets by more than $12 billion. Even with access to the public market, it may weigh the company down for a while.
  2. There is significant uncertainty in US healthcare payment reform as the system shifts away from the traditional fee-for-service model. Until payment regulations are more clearly defined, the future remains cloudy for hospitals.
  3. Traditionally, IPOs wear off after the initial hype. It is difficult to assess whether the long-term prospects are favorable to HCA as the healthcare reform bill begins to make its largest impact starting around 2014.

When assessing the future outlook of HCA, we believe that the near future holds strong potential for the company. Regulations and technological trends favor large hospital systems and it is likely the company will continue to grow its provider talent base.

HCA’s chief concern is paying off debt but with an expected boost from a larger insured population, and a strong stock performance, they may be able to reduce this debt significantly in the years to come.  Also, its ability to grow through acquisitions represents a key advantage for the company looking forward and will have significant negotiating power with payers and regulators.

HCA Investment Thesis

Given its market position and trends, it would seem that HCA stock is likely to increase over the next several months.

HCA is undervalued:

  1. With an IPO price of $30 per share, it has risen to $33.74, or over 12% in just three weeks.
  2. Soleil Securities analysts initiated coverage on shares of HCA Holdings Inc (NYSE: HCA). They set a “buy” rating and a $39.00 price target on the stock.
  3. Other healthcare providers’ stocks are performing very well in the market: Health Management Associates is up 14% YTD, Tenet is up 11% YTD, Community Health Systems is up 7% YTD.
  4. HCA’s adjusted EBITDA for 2010 of $5.9 billion was greater than the other U.S. public hospital companies combined.
  5. MadMoney’s Jim Cramer: “More important though… in the next month… the “quiet period” ends, where the brokers can start talking about HCA. That means the analysts at these firms are going to start coming out with “research initiations.” That’s the term, initiations. And I bet the stock will get a lot of buy, buy, buy ratings… something that should give you a nice additional pop. In fact, given how many firms underwrote the deal… Bank of America, Citigroup, J.P. Morgan, Barclays, Credit Suisse, Deutschebank, Goldman Sachs, Morgan Stanley… I think the relaunch of coverage here will be amazing.”

We believe that HCA is likely to benefit from healthcare regulatory and payment trends that have benefited its publicly-traded hospital peers. Furthermore, HCA is well positioned to perform even more strongly as it continues to grow and capitalize on the new healthcare landscape. We therefore will be going long on HCA.

Portfolio Performance:


This was a great week in the markets, with major indices up from 1.16 – 1.40%.  Happily, our portfolio outpaced these gains by a significant margin by posting a gain of 2.71% ($1,113.40).  This brings our overall gain up to 3.88% ($1746.40), and our annualized performance up to 27.8%.  The S&P 500 has seen gains of only 0.87% over the same period, so we’re doing pretty well.

All of our positions saw gains this week, but the standouts were definitely FXH and IHF, which both saw gains of 3.6% this week.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Stocks: HCA