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Coronavirus Special: Buy HCA Healthcare

Mar. 02, 2020 5:36 AM ETHCA Healthcare, Inc. (HCA)CYH, THC4 Comments
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  • If the coronavirus situation becomes more serious and causes a large number of people in the US to get hospitalized, HCA as the largest American hospital company should benefit.
  • If the epidemic passes quickly, overall stock valuations should go up.
  • HCA’s shares have close to 30% upside to fair value.
  • A large-scale change in government’s role in healthcare remains the biggest risk.
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Stocks cratered last week on the expectation that the coronavirus will spread, affecting business operations and consumer spending. Companies are canceling non-essential travel and people are reluctant to plan vacations, thus, it is understandable that firms that operate in the travel and leisure field are taking a hit. Supply chain disruptions may affect industrial firms and consumer sentiment may sour. On the other hand, companies like Zoom Video (ZM), Teladoc (TDOC) and Clorox (CLX) are expected to see increased sales, with their stocks rising. Was there a company that could benefit if the epidemic became a pandemic and whose stock hadn’t gone up? Surprisingly, I found one which had actually declined as much as the market had. I present HCA Healthcare (NYSE:HCA), the largest hospital company in America, with a small presence in the UK.

The thesis here is simple. If large numbers of people get sick and hospitalized, it is natural to expect a hospital company to benefit. If they don’t and the scare passes, then stock valuations go up and the stock does too. Heads, HCA wins; tails, the virus loses (and HCA still wins). I like the odds.

Nine months ago, I published an article saying that HCA belonged in a healthy portfolio. Over the next few months, the stock gained more than 20%, but has given up most of those gains, now trading at 11x EPS. I see 30% upside ahead.

Financial summary

HCA is expected to generate revenue of $54 billion this year, 6% more than last year, aided by a few tuck-in acquisitions. The company has consistently generated an operating margin of 14-15% over the last few years. The consensus expectation is for EPS of $11.71 this year, up 11% over the prior year, with the benefit of some shares being bought back. Note that the EPS numbers are clean figures, after stock compensation and the

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This article was written by

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Run a long/short partnership. 25 years of experience in business and finance. CFA charter holder. Analysis is fundamental, focused on the numbers and takes a skeptical view of company declared pro-forma figures. Available for educational and entertaining speaking engagements. Institutional investors looking for short ideas may contact me.

Analyst’s Disclosure: I am/we are long HCA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (4)

Stock Scanner profile picture
Thanks all for your comments.

I believe that given all the advance warning, healthcare workers will take ample protective measures to ensure they do not get infected. Sure, there will still be some who will. Most people affected have not required long hospital stays. I don't believe insurers will push hospitals into insolvency. (And however bad it may sound, if competing hospitals go bust, that's good for HCA).
While Covid-19 looks like an opportunity for healthcare stocks it is also the biggest risk they have faced in decades. If the US experiences patient numbers similar to China hospitals will be overwhelmed with patients, healthcare workers will fall ill resulting in staffing and quality issues. If patients require long stays and intensive care insurance companies will balk at paying for all of it or stretch reimbursement over such a long period that hospitals will experience severe liquidity issues. The largest healthcare providers may be able to weather the storm, many hospitals will be pushed into insolvency even as they have the highest billings they have ever experienced.
If the virus overtakes the ability of hospitals to provide services and health workers become infected, the virus will have a negative impact on hospital's margins. And as you point out the impact of stress on margins, could be magnified because of their debt.
gbussey profile picture
Funny, that was my plan. I worked for them about 7 years ago and they are very well run.
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