With talk of a potential recession buzzing in the financial media, investors will be keeping a close watch on what companies say and do this earnings season. It's early, but one large company just sent a shockwave through the healthcare industry that could have far-reaching implications.
HCA Healthcare (HCA -1.54%) is the largest health system in the U.S. It operates 182 hospitals and 124 freestanding surgery centers. And it just cut its earnings guidance for this year. Here's why it made the cut and what that could mean for the rest of the healthcare industry and beyond.
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Don't look in the rearview mirror
Investors focusing on the quarter just reported would think everything is fine. The company posted nearly $15 billion in revenue. That was 7% higher than the same quarter last year and 19% above the first quarter of 2019. Other than the beginning of the pandemic, it continued a steady trend of top-line growth.
HCA Revenue (Quarterly) data by YCharts
But CEO Sam Hazen had an update that shattered the expectations of optimistic analysts. He shaved $500 million off of management's initial 2022 revenue projection of between $60 billion and $62 billion. That might not seem like much, but the midpoint would represent HCA's slowest growth -- other than during 2020 -- in a decade. But it wasn't the only bad news.
Costs are rising too
Unfortunately for shareholders, it isn't just revenue that is heading in the wrong direction. Hazen also pointed to rising labor costs and cut the guidance for profits as well. Normally, a management team that sees slower growth can tighten the corporate belt and cut expenses. For HCA, paying more for staff presents a double whammy. The new guidance puts net income as a percent of revenue at 8.5% this year. That isn't bad, historically. But it's far below what Wall Street has gotten used to.
HCA Net Income (% of Annual Revenues) data by YCharts
How far will the ripples be felt?
A guidance cut on the top and bottom line -- especially citing higher labor costs -- should get investors' attention. HCA is the biggest operator in the industry, and it won't be alone in facing these challenges. That could mean procedure volumes falling for companies like Johnson & Johnson (JNJ -1.15%) and Intuitive Surgical (ISRG -0.50%), or patients putting off treatment when the economy isn't doing well. The latter scenario would be bad news for an insurer like UnitedHealth Group (UNH 1.35%). When people delay getting healthcare, insurers benefit in the short term. But they end up paying more later on when patients who have put off healthcare become sicker as a result.
But it's not just healthcare that's affected. HCA's guidance cut could be seen as a bad omen for the economy as a whole. While higher wages are good for consumer spending, the increases aren't keeping up with overall inflation. Despite higher pay, the average American saw a pay cut of more than 2% last year adjusted for inflation. Healthcare is a unique profession with high demand and low supply. But if the issue is about labor, large employers like Amazon, Walmart, and FedEx could be the next in line to sound the alarm.
