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Coverage Initiation: HCA Holdings, Inc.
Value Line recently initiated coverage of HCA Holdings (HCA) in its flagship product, The Value Line Investment Survey. The company was founded in 1968 by Dr. Thomas Frist, Sr., Jack C. Massey and Dr. Thomas Frist, Jr., after the three men sought to form a hospital management company that would provide capital to expand and maintain the latest medical technology.
The company grew rapidly, building new hospitals in under-served communities, acquiring facilities, and contracting to manage hospitals for other owners. With 11 hospitals, HCA filed its initial public offering in 1969. Both the industry and the company experienced rapid growth over the next decade, which was then followed by a shift to consolidation in the early 1980s. In 1988, believing its stock was undervalued, the company completed a $5.1 billion leveraged buyout and later re-emerged as a public company in 1992. Through the mid-90s, HCA completed many acquisitions and the company ballooned to a market cap of roughly $20 billion with approximately 285,000 employees, more than 350 hospitals, 145 outpatient surgery centers, 550 home care agencies, and several other ancillary businesses.
In 1997, Dr. Frist, Jr. returned as Chairman and CEO and immediately announced plans to restructure the company and focus on providing high-quality healthcare through a core group of market leading hospitals. HCA sold its non-hospital businesses as well as several facilities that did not fit this strategy.
On November 17, 2006, HCA became a private company for the third time when it completed a merger in which the company was acquired by a private investor group including affiliates of Bain Capital, KKR & Co. (KKR) and Merrill Lynch Global Private Equity, and HCA founder Dr. Thomas F. Frist, Jr. The total transaction was valued at approximately $33 billion, making it the largest leveraged buyout in history at the time. HCA became a publicly traded company once again when shares began trading on the New York Stock Exchange under the ticker symbol “HCA” on March 10, 2011. The investor group continues to own approximately 62% of the outstanding shares and can consequently influence the decision-making process of the company.
Now based in Nashville, Tenn., HCA is currently a leader in the healthcare services segment, delivering about 4%-5% of all inpatient care in the country. At December 31, 2011, the company operated 163 hospitals, comprising of 157 general, acute care hospitals, five psychiatric hospitals, and one rehabilitation hospital. In addition, it operated 108 freestanding surgery centers. Facilities are located in 20 states and England and it employs approximately 199,000 people.
The company’s general, acute care hospitals typically provide a full range of services to accommodate such medical specialties as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. Outpatient and ancillary health care services are provided by its general, acute care hospitals, freestanding surgery centers, diagnostic centers and rehabilitation facilities. Psychiatric hospitals provide a full range of mental health care services through inpatient, partial hospitalization, and outpatient settings.
HCA Holdings believes its hospitals compete on the basis of many factors, including the quality of care, ability to attract and retain quality physicians, skilled clinical personnel and other health care professionals, location, breadth of services, technology offered, quality and condition of the facilities, and prices charged.
With increased competition, admission constraints, and payer pressures expected to continue, HCA plans to meet these challenges by expanding and updating its facilities (through acquisitions and/or its own investments), offer market competitive pricing to private payer groups, and provide new or expanded programs and services.
Among the concerns facing the company is its substantial amount of liabilities. Indeed, debt on the company’s balance sheet equals more than 100% of its assets. This substantial leverage could adversely affect the company’s ability to raise additional capital to fund operations, limit its ability to react to changes in the economy or industry, expose it to interest-rate risk to the extent of its variable-rate debt, and prevent HCA from meeting its obligations. While these are big concerns, almost two-thirds of the debt is due in more than five years. Furthermore, free cash flow (defined as cash flow from operations minus capital expenditures) has risen substantially from 2009 to 2011 at an average annual rate of almost 26% and may be used in the future to lower indebtedness. Additionally, potential changes in government health care programs can affect the industry as a whole. Specifically, the Patient Protection and Affordable Care Act represents a potential significant change to the health care industry. The outcome of this regulation, however, is unpredictable at this time.
Despite the industry concerns and substantial indebtedness, some investors may still find this equity attractive. From 2007 to 2011, sales have grown at an average annual rate of almost 6%, while expenses have risen only 4% per year. This has led to earnings per share advances of 25% annually, on average. Moreover, while the company does not pay regular quarterly dividends, it has rewarded shareholders with a special dividend payout from time to time. In 2010 equity holders were rewarded with a $9.43 per share dividend and so far in 2012 the company has paid out $4.50 per share.
Subscribers interested in this healthcare services provider are advised to consult Value Line’s quarterly reports for HCA Holdings, as well as any Supplementary reports and relevant articles as important news items arise.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.