EUR 850.00 For Business Accounts Only

Morningstar | HCA Firing on All Cylinders; Raising Our FVE

Narrow-moat HCA reported another impressive quarter, exceeding consensus expectations while coming in roughly in line with our thinking overall. We'll likely raise our fair value by a mid-single-digit percentage as we update our model for the quarter, consider management's revised outlook for the year, and take into account the cash flows received to date. That said, with the current market price implying a valuation near 8.7 times and 13.2 times our estimates for 2018 adjusted EBITDA and earnings, respectively, we think the stock is reasonably valued when compared with our forecasts that call for sustainable earnings growth near 10% over the longer term.

The firm's better-than-anticipated performance comes as same-facility revenue has now increased above trend for the third consecutive quarter. Clocking in at 6.4%, versus 5.7% in the first quarter and 5.8% in the final period of 2017, same-facility revenue growth has benefited from improving admission trends and pricing improvements that have eclipsed 3.5%, a level not seen since mid-2014. This has been driven by both higher overall acuity, with case-mix trending north of 4% versus long-term expectations nearer 2%-3%, and better managed-care admissions growth. Same-facility equivalent admissions of commercially insured patients grew 1.9% year on year, versus flat or down performance throughout much of 2017, helping buoy overall reimbursement.

While the company's fundamentals are likely to ebb and flow over time, we believe our forecasts value the enterprise using reasonable midcycle operating assumptions. That said, management's stepped-up capital investment plan for the next three years, the favorable Medicare inpatient payment update proposed for 2019, and improving performance out of recently acquired facilities could provide the tailwinds needed to continue operating in excess of management's 4%-6% normalized EBITDA growth guidance over the near term.

On a reported basis, the firm increased EBITDA 6.6% in the quarter and nearly 6.1% year to date. After adjusting for the profitability drag created via recently acquired and divested facilities, HCA's EBITDA growth rate falls north of 8% for both the quarter and first half of the year--stellar performance that we believe accounts for much of today's positive market reaction. Additionally, management reported nearly 90 basis points of EBITDA margin expansion on a same-facility basis, building on the 40 basis points reported in the first quarter. We think the firm's ability to continuously find operating efficiencies against the backdrop of tight labor markets and the specter of wage inflation helps underscore the scale-based cost advantages that underpin the company's narrow economic moat.