- HCA Healthcare is a fascinating business with a strong track record of consistent growth.
- The cash generated by the company makes it cheap for long-term investors.
- Add in its reasonable leverage and recent share buybacks and the company makes for an attractive prospect for investors to consider.
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There are many different ways to play the growing and profitable medical industry in the US. One of the more stable opportunities that investors can consider is buying a company that actually owns hospitals and other related medical facilities that are necessary for the industry to function. A prospect in this niche that can be considered is a company called HCA Healthcare (NYSE:HCA). Even throughout the COVID-19 pandemic, the business demonstrated attractive growth and positive and growing cash flow generation. What's more, shares of the enterprise appear to be priced at fairly attractive levels on a forward basis. All of this combines to make the entity an interesting prospect that could offer some nice upside potential down the road.
A unique and growing enterprise
HCA Healthcare is an interesting business because of what its focus is on. For the most part, the entity owns and operates hospitals. In addition to that, it owns other medical facilities as well. But they only account for a smaller portion of the overall business by comparison. According to management, the company currently possesses 187 hospitals, plus it has 122 freestanding outpatient surgical centers to its name. It also has 21 freestanding endoscopy centers in its portfolio as well. All of these operations are spread across 20 U.S. states, as well as the United Kingdom.
But HCA Healthcare was not always this large. Back in 2016, for instance, the company owned just 170 hospitals and 118 freestanding outpatient surgical centers. The total number of licensed beds in its portfolio back then was 44,290. Today, that figure has increased to 49,693. Over this same window of time, the company has also benefited from rising occupancy rates and its locations. In 2016, the occupancy rate of its properties was just 57%. By the end of 2020, it had grown to 66%. And as of the end of the first half of its 2021 fiscal year, it had risen to 69.1%, up from the 63.5% that it stood at a year earlier. Some of this increase might be attributable to the current pandemic, but it is difficult to tell. Because in 2018, the occupancy rate at its locations was 67%, while in 2019 it was 68%. These figures predate the wide spread of the pandemic.
As management added on to the physical footprint of the business, its financial footprint expanded as well. According to management, revenue in 2016 totaled $41.49 billion. This increased each year, climbing eventually to $51.53 billion in 2020. This year, the company looks set to grow further, with revenue in the first half of the year totaling $28.41 billion compared to the $23.93 billion that it was in the first half of 2020. For the full fiscal year, management expects revenue to come in at between $57 billion and $58 billion.
On the bottom line, the picture for the business has been a bit more volatile but attractive nonetheless. Net income bottomed out in 2017 at $2.22 billion. But in 2020, it had risen to $3.75 billion, up from the $3.51 billion generated a year earlier. But net income is less important to me than operating cash flow. This figure has risen fairly consistently over the years. After dropping from $5.65 billion in 2016 to $5.43 billion in 2017, it climbed nonstop until hitting $9.23 billion last year. EBITDA has been even more impressive, rising consistently from $8.22 billion in 2016 to $10.04 billion in 2020. In the first half of 2020, net profits jumped from $1.66 billion to $2.87 billion. EBITDA surged from $4.87 billion to $6.27 billion. Operating cash flow has been a bit trickier, actually declining from $10.10 billion to $4.24 billion. However, if you adjust for changes in working capital, this figure actually increased from $4.28 billion to $4.97 billion.
Just as in the case of revenue, management has high expectations on the bottom line for this year. Using midpoint estimates, it is likely the business would generate a net profit in 2021 of $5.56 billion. EBITDA should come in at around $12.3 billion, and operating cash flow, by my calculations, will come in at around $10.73 billion. Using these figures, we can reasonably calculate how expensive the company is. At present, the business is trading at a forward price to earnings multiple of 14.8. That's not great but it's not exactly pricey either. Its other metrics, however, look far better. As an example, it is trading at a forward price to operating cash flow multiple of 7.6. And its forward EV to EBITDA multiple stands at 9.2. These are very attractive levels in my opinion. Another benefit to shareholders is the fact that management continues to reinvest in the enterprise. Not only are they growing the company's physical footprint, but they are also buying back stock. In the second quarter this year alone, the business repurchased 11.26 million shares of stock free combined $2.29 billion. This should be viewed as a perk on top of the growth the company is achieving.
Based on all of the data provided, HCA Healthcare looks to be a fantastic business that is trading at a very low price. Yes, the price to earnings multiple of the firm is not great, but its other pricing multiples are. The company also seems to be growing consistently and its net leverage ratio, on a forward basis, is fairly low at 2.6. All of these things combined make the enterprise an intriguing prospect for investors to consider buying into.
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This article was written by
Daniel is an avid and active professional investor. He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.
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