(By Mani) HCA Holdings, Inc.
) offers an excellent opportunity to play the long-term secular growth in demand for healthcare services.
The company has several compelling, competitive advantages including industry leading scale, significant cash flow generation, market share density in fast growing geographies and the ability to drive outsized EPS growth via debt refinancing.
With nearly $37 billion in annual revenue, HCA is the largest publicly traded healthcare provider in the U.S., providing approximately 4-5 percent of all U.S. hospital services, which accounted for about 33 percent of total healthcare spending in 2011, or $849 billion, according to the Centers for Medicare and Medicaid Services.
HCA operates 164 hospitals and enjoys a leading market share position in 14 of the 25 fastest growing markets across the country. The company is currently active in 29 major metropolitan markets, 17 of which have populations of one million or more.
"HCA has consistently been at the top end of the industry in key metrics such as volume growth and operating margins as its scale allows it to generate cost synergies that smaller operators are not able to achieve. HCA generates above-average volume growth, reflecting its strong presence in high-growth markets," UBS analyst A.J. Rice wrote in a note to clients.
Even in 2010 and 2011, which can be considered among the most difficult years in terms of patient volumes in recent history, HCA outperformed the group by approximately 160 basis points (bps) and 370 bps respectively.
HCA generates strong free cash flow, which it opportunistically has deployed for the benefit of shareholders. The company indicated that it would look to use its free cash flow to further reduce leverage after the completion late last year of the $1.45 billion buyout of its minority interest partner in the Denver HealthONE joint venture.
In addition, the recent healthcare ruling is a positive for certain health care providers, with the biggest beneficiaries being hospitals such as HCA. Hospitals stand to benefit most for the simple reason that more people with insurance means more business for them, coupled with higher reimbursement rates.
Meanwhile, the low end of HCA's 2012 EBITDA guidance assumes a year-over-year increase of only $139 million, which Rice believes is conservative. For instance, the company's HealthONE JV transaction alone is expected to contribute approximately $200 million to $225 million of EBITDA in 2012.
"HCA should also annualize the impact related to pressure on Medicare acuity that began in 2Q11. We believe these tailwinds will more than offset the Medicaid pricing pressure HCA faces in 2012, and the company has an opportunity to meet or exceed the high end of its targeted range for EBITDA," Rice noted.
Having emerged from a leveraged buyout last year, HCA has a substantial debt load that could limit its ability to pursue its growth strategies. At the end of the first quarter, HCA had approximately $27.9 billion of total debt.
Still, HCA's leverage ratio has declined by 50 bps since its IPO, and the company is expected to generate $1.25 billion to $1.50 billion in free cash flow that is available to meet any near- to intermediate debt maturities comfortably.
Over the years, HCA has had an uncanny ability to create value as 20 percent of its shares are held by employees and affiliates. Last fall, when HCA's stock sold off precipitously after a soft quarterly performance, HCA bought 16 percent of the company back for $18.61 a share from a private equity investor. Shares are currently trading at $29 levels.