Bireme Capital - HCA Healthcare: Quite Cheap Despite Many Competitive Advantages

Aug. 05, 2022 9:39 PM ETHCA Healthcare, Inc. (HCA)THC

Summary

  • HCA Healthcare, at 10x 2022 earnings at 6/30/22, is quite cheap despite having many competitive advantages.
  • HCA is on track to generate about $60b in revenue for 2022.
  • The stock has appreciated ~230% since our initial purchases, but trades at a lower earnings multiple today due to excellent business results.
  • HCA remains a large position for our firm.

HCA Healthcare building in Pearland, Texas, USA.

JHVEPhoto/iStock Editorial via Getty Images

The following segment was excerpted from this fund letter.


HCA Healthcare (NYSE:HCA)

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.

This article was written by

Single stock ideas excerpted from fund letters published by Seeking Alpha.

Additional disclosure: The performance in the charts is the performance of the securities in all Bireme accounts ("Bireme Master Account") and the strategies that make up the account holdings from inception through 6/30/2022. The performance in the tables is the performance from inception and from 4/1/2022 through 6/30/2022. Past performance is not indicative of future results. It is not possible to invest directly in an index. Index performance does not reflect charges and expenses and is not based on actual advisory client assets. Index performance does include the reinvestment of dividends and other distributions. The performance in the Bireme Master Account is shown as net of 1.75% advisory fees. Some clients may receive services at a lower advisory fee with a performance fee based on the gains in the account. Returns are shown net of fees at the account level, and gross of fees at the individual strategy level. For current performance information, please contact us at (813) 603-2615.

Sources: Bloomberg Finance LP, Interactive Brokers LLC, S&P Compustat, Bireme Capital LLC.

© Bireme Capital LLC.

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