According to CNN, HCA Healthcare (NYSE:HCA) is the largest publicly traded hospital stock in the U.S. by market capitalization ($64 billion). It's got scale, with more than 178 acute care hospitals, 121 freestanding surgery centers, 21 endoscopy centers, over 1,360 physicians' clinics, and 48,000 hospital beds across the country. And according to its recent 2021 investor presentation, it's got an average of 25% market share in the markets where it operates -- a remarkable feat in a generally fragmented U.S. hospital landscape.
The company has no comparable publicly traded rivals, due to the fact that most hospital systems are either private or affiliated with a university. Universal Health Services (NYSE:UHS), which operates 360 inpatient facilities (mostly mental health) across the U.S., might be the closest, and it's nowhere near HCA's scale.
And while HCA's capital position might appear tenuous, with $30 billion in debt compared with $572 million in equity, investors need to realize that HCA -- like other hospitals -- can expect to be bailed out by the government in a worst-case scenario. (This has already happened once during the pandemic; HCA received $6.2 billion of CARES Act funding in 2020, and by the fourth quarter of that fiscal year, the company had already repaid $6.1 billion.)
We already know that HCA has made it this far through COVID in profitable condition. A return to high-profit-margin elective surgeries should superpower its earnings. Here's why I think HCA Healthcare is poised for a breakout in a post-pandemic world.
Impressive results in a difficult year
For full-year 2020, HCA's financial statements show a remarkable 0.4% increase in revenue. That's notable not just because other healthcare companies have shown losses, but because HCA managed to do it even while experiencing a roughly 10% decrease in the volume of patients. That decline was more than fully offset by increases in revenue per patient, as well as by revenue from a few more hospitals HCA acquired throughout the year.
I think the 10% drop in patient volume is ephemeral -- but the gains in revenue per patient could stick, at least to some degree. That means net income could rise considerably as procedures, especially high-profit-margin elective procedures, come back online.
Roughly 50% of HCA's facilities are located in either Texas or Florida. Florida, in particular, is a state with both high levels of tourism and a high population of senior citizens. That meant that during COVID, procedures were put off en masse as tourists stayed away and senior citizens avoided leaving the house for non-essential tasks.
But both of those trends look to be reversing now, with vaccines rolling out and tourism on its way back with a vengeance. Texas, too, is no slouch in terms of tourism, and neither is the Nashville, Tennessee area, HCA's third most important market. All of these markets, I expect, will come roaring back as travel and tourism pick up.
Getting ahead of investor sentiment
HCA is valued very cheaply right now, with a price-to-earnings ratio of 16 and a price-to-earnings-growth ratio of about 1.6. That cheap valuation makes this stock like a coiled spring, ready to pop back up strongly once positive investor sentiment has really taken hold.
We're seeing that begin to happen already -- according to The New York Times, coronavirus infections in the U.S. have declined from their daily peak of almost 300,000 in January to about 65,000 today. And thanks to the targeted nature of the initial vaccine rollout, the news about deaths and hospitalizations is even better, with older Americans who were more at risk becoming better protected.
All this is happening in the context of a market that appears to be shifting its attention from growth to value stocks. Since November -- a month in which energy stocks (which are value stocks by nature, as is HCA) returned 20% -- value stocks have outperformed.
HCA's 19% return is in line with the S&P 500 market since Nov. 1, but far above the 11% return from the Health Care Select Sector SPDR ETF (NYSEMKT:XLV). And I think its outperformance is just getting started. Lackluster patient volume is sure to make a rebound, and the market is turning ever more strongly toward value stocks like HCA -- both of which should provide continued tailwinds into 2021.
Growth in unexpected places
Many investors see healthcare stocks as defensive, safe choices to anchor a portfolio during market turbulence. But the right healthcare play can mean growth, too. HCA is currently undervalued, and it's on the winning side of some recent favorable shifts in the macro environment -- particularly the return of tourism and elective medical procedures to the U.S. economy.
As if that weren't enough, there's evidence that the U.S. government is ready to bail the company out at the slightest hint of trouble. Speaking of which, if such trouble were on the horizon, we would have seen some hint of that in 2020 -- but HCA proved that its management was capable enough to stick to a long-term plan that steadily enriches its shareholders.