CAPScall of the Week: HCA Holdings

For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why I've made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database, and make a CAPScall of outperform or underperform on that company.

For this week's round of "Better Know a Stock," I'm going to take a closer look at HCA Holdings (NYSE: HCA  ) .

What HCA Holdings does
HCA Holdings is a health-care services provider that runs hospital, surgery centers, diagnostic and imaging centers, radiation and oncology centers, and rehabilitation centers throughout the United States. HCA is the largest hospital operator in the world, with 162 hospitals in its portfolio as of Dec. 31, 2012.

For the fourth quarter, HCA reported an 8.5% increase in total revenue to $8.4 billion as same facility equivalent admissions jumped 5% and same facility emergency room visits bolted higher by 12.7%. Simply put, without the aid of additional facilities, patients are utilizing the hospital more, with a slight uptick of 0.5% in terms of same facility revenue per equivalent admission. 

Whom it competes against
HCA has a myriad of enemies as a hospital operator, but none is more of a nuisance to its bottom line than doubtful accounts.

As a hospital operator, HCA can't turn down treatment to anyone, however, with so many people still uninsured, HCA is forced to provision quite a bit of its annual revenue toward doubtful accounts that will go uncollected. According to its 2012 annual report, it provisioned $3.77 billion of its $36.8 billion in annual revenue, or 10.25%, for doubtful accounts. This fear of growing unpaid balances comes on top of increased hospital competition within the sector from the likes of Tenet Healthcare (NYSE: THC  ) .

However, this is about to get turned upside down with the full implementation of the Affordable Care Act (also known as Obamacare) in 2014. Passed in 2010, the ACA will mandate individuals to carry health insurance which should remove the majority of the burden of doubtful provisions from HCA's and Tenet's balance sheets. As I've stated previously, no sector benefits more from the implementation of the HCA than hospital operators.

But, the ACA isn't a welcome sight for others in the sector, including some insurers like WellPoint (NYSE: WLP  ) and home health-care providers like Amedisys (NASDAQ: AMED  ) and Gentiva Health Services (NASDAQ: GTIV  ) . Shareholders in WellPoint are apprehensive of the bill because it caps the company's premium profits and denies it the right to turn away patients with pre-existing conditions (similar, of course, to what a hospital operator like HCA deals with on a daily basis). For home health-care providers Amedisys and Gentiva, a combination of lower Medicare reimbursements coupled with more stringent ACA laws will make boosting prices difficult and could ultimately eat into their bottom-line profit.

The call
After carefully reviewing the prospects for HCA Holdings, I've decided to place a CAPScall of outperform on the company.

This call was actually a bit difficult considering that HCA has already appreciated close to 60% in the past year. I had tinkered with the notion of waiting for a pullback before firing my outperform call, but the sheer boost from Obamacare that these hospital operators are bound to receive will more than offset a minor correction in HCA's share price.

Just by the numbers, I would anticipate within two or three years from now that HCA's doubtful provisions will have dropped from $3.77 billion in 2012 to somewhere around $500 million to $800 million. That alone would put $3 billion in revenue back into circulation in HCA's pocket, which could boost annual cash flow by as much as $450 million to $500 million by my estimates. That's money that could be used for additional acquisitions, the initiation of a dividend, share repurchases, or even state-of-the-art equipment that would make its facilities stand out above its peers.

From a valuation perspective, HCA is valued at just 10 times forward earnings even after its huge run-up compared to Tenet, which is valued at a frothier 13 times forward earnings despite nearly identical five-year growth projections from analysts. From every angle, HCA just makes sense to own over the long run as our health-care system adapts to Obamacare.

While you can certainly make huge gains in hospital operators, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.


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  • Report this Comment On March 26, 2013, at 3:14 PM, RWK3939 wrote:

    Uncompensated Care (doubtful provisions) is billed by hospitals at inflated "retail" prices. Managed Care & govt reimbursements (which would apply after Obamacare) are at least 40% less per occurance.

    In addition, a high % of uncompensated care is reimbursed to hospitals by govt agencies.

    Your $3 billion annual revenue increase is significantly overstated.

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