HCA Healthcare (HCA -0.13%) is a top owner and operator of medical facilities, including 180-plus hospitals and has roughly 2,200 ambulatory sites of care. The stock gives investors a great way to gain exposure to the healthcare industry. And now that hospitals aren't overrun with cases of COVID-19 and are returning to their normal operations, it could make for a good buy.
However, year to date, shares of HCA are still down 22% (worse than the S&P 500's decline of 17%) as rising labor costs in previous quarters chipped away at the company's profitability and made investors bearish on the shares. Is this beaten-down healthcare stock truly a deal for investors, or are there problems that should keep you away from it?
Growth has been relatively stable
One of the drawbacks of HCA's business is that typically there isn't a whole lot of growth due to the nature of its business; the company is dependent on patient volumes and how much it can collect from them and third-party payers. One of the best ways the company can grow is by adding to its portfolio and pursuing acquisitions. Over the past five years, HCA has averaged a decent year-over-year growth rate of 7.5%.
HCA Revenue (Quarterly YoY Growth) data by YCharts
Aside from the impact of the pandemic, the company's financials have largely been growing at a steady rate. For long-term investors, that type of predictability that can be incredibly valuable. In the most recent quarter, investors might notice a dip in the growth rate to less than 2.7%. HCA noted that for the period ended June 30, facility admissions (on a comparable basis) were down 1.2% and it saw similar declines in surgeries.
However, the growth rate can and will fluctuate, and so this may not necessarily be a cause for alarm. Plus, HCA also sold some hospitals last year and had fewer locations versus the prior-year period (but on the flip side, it had more freestanding surgery centers).
Cash flow and operating margin remain strong
In addition to revenue growth, two numbers that investors should always consider when looking at stocks are free cash flow and operating margin. The former tells you how well the business is generating cash and whether it can sustain its level of growth without having to dilute shareholders. The latter, meanwhile, can be a more useful measure than just profit margin, because operating profits come before non-operating items such as gains or losses, which can distort a company's earnings. And on both fronts, HCA looks to be doing well:
HCA Free Cash Flow (Quarterly) data by YCharts
Like its revenue growth, the company's free cash flow has been fairly consistent. And operating margin looks to be on the higher end of where it was before the pandemic began. One of the challenging trends the company had to deal with was that when COVID levels were high, HCA's hospitals were spending more money on temporary nurses due to staffing shortages. But with that trend now subsiding, HCA could post even better profit numbers in future quarters.
Is the stock a cheap buy?
When considering its five-year average, HCA's stock definitely looks cheap, trading at less than 10 times its trailing profits:
HCA PE Ratio data by YCharts
The Health Care Select SPDR Fund averages a price-to-earnings multiple of 20, which makes HCA look even better by comparison.
Overall, with a strong business that generates predictable growth and enjoys strong operating margins and free cash flow, HCA does appear to be a solid investment today, especially at its modest valuation. For long-term investors, buying and holding the stock could be a great decision.
An added incentive is that HCA pays a yield of 1.1%. Although that's less than the S&P 500 average of 1.7%, it can pad your returns and ensure that you're collecting some recurring income as you hang on to the stock.
