Morningstar | HCA's Fourth-Quarter Results Fell in Line With Our Expectations; Shares Fairly Valued
Narrow-moat HCA Healthcare reported a strong finish to an impressive 2018. Same-facility revenue growth ended the year up 6.4%, versus 3.7% in 2017, aided by consistently strong gains in both equivalent admissions and pricing across payer groups. As we update and roll our model we don't expect to make any major adjustments to our forecast. However, we may raise our fair value estimate by a modest amount to account for the cash flows received since our last update and the expected contribution from the firm's pending acquisition of Mission Health, which is expected to close in the coming days.While 2019 commentary suggests another strong year ahead, we'd caution investors from projecting the firm's recent outperformance into perpetuity. We're leaving our longer-term forecasts in place, which call for growth rates more consistent with management's 4%-6% EBITDA growth target versus recent numbers that have trended nearer 6%-8%. Notably, management's commentary suggested the commercial utilization environment had softened in recent months, with demand modestly down marketwide. This is in contrast with HCA's commercial same facility equivalent admissions that grew 1.6% in the fourth quarter, which is roughly consistent with managed care trends throughout the year and implies continued market share gains for the firm.
Additionally, improved pricing from both Medicare and private payers helped the firm expand its margin profile in 2018, which resulted in same-facility adjusted EBITDA margin up roughly 70 basis points with broad contribution from labor, supply, and other operating expense lines. We're somewhat skeptical that this is sustainable at a consolidated level, with a firmwide adjusted EBITDA margin eclipsing 20% in the fourth quarter. We anticipate steady state margins roughly 100 basis points lower, nearer the company's long-run average of 19%, which is more than adequate to sustain the firm's high-teens returns on capital.
HCA Healthcare is a holding company. Through its subsidiaries, partnerships and joint ventures, the company owns and operates hospitals and related health care entities. Most of the company's general, acute care hospitals provide medical and surgical services, including inpatient care, intensive care, cardiac care, diagnostic services and emergency services. The general, acute care hospitals also provide outpatient services such as outpatient surgery, laboratory, radiology, respiratory therapy, cardiology and physical therapy. The company's psychiatric hospitals provide therapeutic programs including child, adolescent and adult psychiatric care, adolescent and adult alcohol and drug abuse treatment and counseling.
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