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Morningstar | HCA Healthcare Starts 2019 Well Ahead of Expectations; Raising Fair Value Estimate

HCA Healthcare reported first-quarter numbers that handily beat our and consensus expectations. Outperformance was broad based, with continued strength in pricing, volume, and cost management. We think these results are characteristic of the firm's narrow economic moat and superior competitive positioning relative to peer facilities. Indeed, management indicated it gained 50 basis points of inpatient market share as of the most recently available data, putting firmwide share at 25.3% within its markets. As we update our model we'll likely raise our fair value estimate by a mid-single-digit percentage, but we continue to view shares as approximating fair value.

Last quarter we expressed skepticism that recent strength at the firm could be sustained over the long term--these results did not play into that thesis. Same-facility revenue growth of 6.2% showed no signs of deceleration compared with results through much of last year, and firmwide cost management came in better than our expectations across the board. Wages, supplies, and other operating expenses all showed impressive leverage leading to adjusted EBITDA growth of nearly 20% year over year, beating our model by $300 million. While management indicated 300 basis points of growth can be attributable to recent acquisitions, including the Mission Health deal that closed in February, the underlying business continues to impress. Notably, same-facility adjusted EBITDA margin expanded 200 basis points compared with 70 basis points during 2018.

Same-facility revenue-per-adjusted-admission continues to be the driving force behind top-line growth, up 4.4% in the quarter versus 3.6% for full-year 2018. Favorable commercial contracting, higher acuity, and better Medicare rates have all helped drive this metric higher over the last five or six quarters. Importantly, the initial proposal for inpatient Medicare rates in 2020 contemplates a market basket update of 3.2%, ahead of the 2.9% adjustment received in 2019.

Management raised its full-year EBITDA guidance outlook by roughly $100 million, but this more or less reflects a payer arbitration settlement received in the quarter that wasn’t contemplated in the prior outlook. Our updated earnings and EBITDA figures will likely fall at the high end of management's revised expectations, and we wouldn’t be surprised to see further upside to these ranges before the end of the year.

Despite persistent outperformance, management held pat on its long-standing 4%-6% long-term EBITDA growth guidance. Our model for the company contemplates growth rates that average near the higher end of this range, but management seemed open to reconsidering this metric over the coming quarters. Along with better organic performance, we think additional opportunities to acquire facilities could also be a consideration in moving this target higher over time, illustrated by the early success of Mission Health.