The following segment was excerpted from this fund letter.
HCA, at 10x 2022 earnings at 6/30/22, is quite cheap despite having many competitive advantages. HCA is the world’s largest hospital company, with 182 hospitals, 125 ambulatory surgery centers, and thousands of physician clinics. The company was started in 1968 by the Frist family, who to this day hold about $11b worth of shares in the company. HCA sees 2m patients per year and is on track to generate about $60b in revenue for 2022. We have owned the stock for years, first writing about it in 4Q17.
Though it has appreciated ~230% since our initial purchases, HCA trades at a lower earnings multiple today due to excellent business results. HCA’s long-term track record is very impressive. They have methodically expanded their healthcare empire over the decades, achieving annual revenue growth of 7% and EBITDA growth of 8% since 2010. This growth has not come with a rise in share count; in fact, shares have declined from 448m in 2013 to 295m today due to repurchases.
Instead, the growth has been due to the high returns on capital enjoyed by the firm, with ROIC of more than 20%.HCA’s operating results are also better than most of its peers, many of whom struggle to consistently generate free cash flow and solid returns on capital. Among nonprofits, smaller community hospitals have notoriously weak financials. Health care services businesses consistently over-index in bankruptcy filings. The industry is not for the faint of heart, but HCA has used its scale and financial strength to outperform its peers over a long period of time.
And yet, the company continues to trade in line with comps such as Tenet Healthcare (THC). Tenet, which owns 80 hospitals, has closer to 10% returns on capital and 12-15% average EBITDA margins, ratios that are materially lower than HCA’s. HCA has more scale, better margins, less debt, and better occupancy ratios (70% vs 50% last quarter).
We fail to see why HCA should trade at 7x EBITDA along with THC. We think it should trade much closer to (if not above) market multiples. But low valuations do have their advantages for cash-flowing companies. HCA has been no exception, with management buying back $8b worth over the past 4 quarters. At current prices, that $8b equates to a roughly 13% buyback yield. HCA remains a large position for our firm.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Sources: Bloomberg Finance LP, Interactive Brokers LLC, S&P Compustat, Bireme Capital LLC.
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