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Higher Expenses Ding HCA Healthcare's Bottom Line

By Brian Feroldi - Jul 31, 2019 at 11:59AM

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Net income took a step backward in the second quarter, as the for-profit hospital conglomerate struggled with expense control.

HCA Healthcare ( HCA -0.88% ), a hospital and healthcare-facility conglomerate, reported its second-quarter results on Tuesday.

Revenue growth almost reached double digits, thanks to steady gains in admissions and the impact of acquisitions. However, expenses grew at a faster rate than revenue, so net income dropped year over year for the second time this year. The management team is on top of the situation and believes the trend will reverse itself in short order. Management even went so far as to boost its full-year profit guidance.

HCA Healthcare second-quarter results: The raw numbers

Metric

Q2 2019

Q2 2018

Change

Revenue

$12.60 billion

$11.53 billion

9.3%

Adjusted EBITDA

$2.29 billion

$2.27 billion

0.9%

Net income

$783 million

$820 million

(4.5%)

Earnings per share

$2.25

$2.31

(2.6%)

Data source: HCA Healthcare. EBITDA = earnings before interest, taxes, depreciation, and amortization.

What happened with HCA Healthcare this quarter?

  • Same-facility revenue grew by 4.3%. Same-facility revenue per equivalent admission increased by 1.7%.
  • Wall Street was expecting $12.61 billion in total revenue, so the actual result came in a bit shy of the consensus estimate.
  • Operating costs expanded 11% to $10.32 billion, which represented 81.9% of total revenue. That was 110 basis points higher than in the same quarter last year.
  • Net income of $783 million, or $2.25 per share, was well below the $2.46 per share Wall Street expected.
  • Management spent $242 million on stock buybacks and retired 1.93 million shares of its common stock. Thanks to the heavy stock repurchases, shares outstanding have dropped by more than 2% over the past year. Management still has the authority to repurchase another $1.753 billion worth of shares.
  • Cash balance at quarter-end was $2.43 billion. Total debt was $36.2 billion.
Doctor and nurse looking forward at the viewer

Image source: Getty Images.

What management had to say

On the call with investors, CFO William Rutherford said two factors drove the lower-than-hoped-for quarterly revenue. First, its commercial revenue growth was “softer” because admissions were flat. Second, the year-ago period had a few one-time revenue items that did not recur this year.

CEO Samuel Hazen also acknowledged that the revenue growth came in a bit below the company's internal forecast, but he doesn't think this will stop HCA from achieving its full-year goals:

Based upon an analysis of our results and year-to-date performance, we are confident in the second half of the year. We have not seen any major structural changes within our markets from a competitive standpoint, physician standpoint, payer standpoint, or execution standpoint. The fundamentals in our markets remained strong, with growing demand for healthcare services.

Looking forward

HCA's stock fell by double digits the morning after this earnings release. However, even though second-quarter results were a bit light, management is so confident in the company's near-term future it decided to boost full-year profit guidance:

Metric

Previous Guidance Updated Guidance
Revenue $50.5 billion to $51.5 billion Unchanged
Adjusted EBITDA $9.45 billion to $9.85 billion $9.60 billion to $9.85 billion
EPS $9.80 to $10.40 $10.25 to $10.65

Data source: HCA Healthcare. EPS = earnings per share.

Hazen ended his prepared remarks on the call by restating his belief that the company is set up for long-term success:

We continue to believe we are well-positioned for growth as we execute our operational initiatives, improve the overall competitive positioning of our local healthcare systems, and integrate our acquired hospitals. The strategic investments we are making to expand the inpatient and outpatient capacity within our networks, and improve our clinical capabilities, create more opportunity for patients to access high-quality convenient care in an HCA Healthcare facility.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

HCA Healthcare, Inc. Stock Quote
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