IPO Pick of the Week: $3.5 Billion HCA Holdings

Includes: CYH, HMA, THC, UHS
by: IPOdesktop

HCA Holdings (HCA) is scheduling a $3.5 billion IPO with a market capitalization of $15 billion at the price range mid-point of $28.50, for Thursday March 10, 2011. HCA is the pick of the week at the price range mid-point.

CONCLUSION -- At the price range mid-point of $28.50 HCA is a good buy. Adjusting for debt repayment from the IPO, HCA’s trailing 12 month P/E ratio is 10.9, lower than other hospital stocks. 71% of IPO proceeds to repay debt, 29% to shareholders.

Publicly held competitors include Community Health Systems (NYSE:CYH), Tenant Healthcare (NYSE:THC), Health Management Associates (NYSE:HMA) and Universal Health Services (NYSE:UHS). For the week ended March 4, 2011, the stocks as a group were up over 7.5%. Individual gains were: CYH +9%; THC +3%; HMA +9%; UHS +9%.

For the six months ended March 4, 2011, the group was up 54% on average. Individual gains were: CYH +46%; THC +75%; HMA +55%; UHS +39%.

Comparative P/E multiples for the 12 months ended December 31, 2010 are:

  • HCA, Holdings, 10.9 -- adjusted for the IPO debt repayment of $2.4 billion
  • Community Health Systems (CYH) 13.6
  • Tenant Healthcare (THC) 21.8 -- P/E multiple excludes $1 million tax credit in the September 2010 quarter. CYH is trying to buy THC
  • Health Management Sysmes (HMA), 17.1 and Universal Health Services (UHS) 18.6.

HCA & industry valuation metrics

BUSINESS -- Largest non-governmental hospital operator in the U.S. and a leading comprehensive, integrated provider of health care and related services. Provides services through a network of acute care hospitals, outpatient facilities, clinics and other patient care delivery settings.
At December 31, 2010, HCA operated 164 hospitals, including 158 general, acute care hospitals; five psychiatric hospitals; and one rehabilitation hospital across 20 states throughout the U.S. and in England.

HCA currently holds a substantial market presence in 14 of the top 25 fastest growing markets in the U.S. and currently maintains the first or second position, based on inpatient admissions, in many key markets.

INDUSTRY CONSOLIDATION TRENDS BENEFIT HCA -- According to the Medical Group Management Association, by next year 2/3 of doctors will be salaried employees of larger institutions such as HCA. Six years ago doctors owned more than 2/3 of U.S. medical practices. Doctors and hospitals have decided they need massive size to survive. This rapid, structural hospital and doctor consolidation should benefit HCA directly.

-- During 2010, consolidated admissions declined 0.1% and same facility admissions increased 0.1%, compared with 2009. Inpatient surgical volumes declined 1.5% on a consolidated basis and declined 1.4% on a same facility basis during 2010, compared with 2009.

Outpatient surgical volumes declined 1.4% on a consolidated basis and declined 1.2% on a same facility basis during 2010, compared with 2009. Emergency room visits increased 2.0% on a consolidated basis and increased 2.1% on a same facility basis during 2010 versus 2009.

Revenues increased 2.1% to $30.683 billion for 2010 from $30.052 billion for 2009 and increased 5.9% for 2009 from $28.374 billion for 2008. The increase in revenues in 2010 can be primarily attributed to the combined impact of a 0.9% increase in revenue per equivalent admission and a 1.2% increase in equivalent admissions compared with the prior year.

Interest expense totaled $2.097 billion for 2010, compared with $1.987 billion for 2009. The $110 million increase in interest expense for 2010 was due primarily to an increase in the average effective interest rate.

LEVERAGED BUYOUT -- On November 17, 2006, HCA Inc. was acquired by a private investor group composed of affiliates of or funds sponsored by Bain Capital, KKR, MLGPE (now BAML Capital Partners), Citigroup Inc., Bank of America Corporation and HCA founder Dr. Thomas F. Frist, Jr., and by members of management and certain other investors.

DIVIDEND POLICY -- During 2010 paid drained the balance sheet by $4.351 billion cash in stockholder dividends. No future dividends are expected on common stock

USE OF PROCEEDS -- $2.4 billion from sale of 88 million shares. Selling shareholders intend to sell 36 million shares for $1 billion or 29% of the IPO.

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

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