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Depth Check – HCA Healthcare, Inc. (HCA) 4th Quarter Earnings – Thesis Confirmed

In August, we recommended HCA Healthcare, Inc. (HCA) stock in a piece titled “Heads I win – Tails I win”. We wrote, “we see a stock that has been hit by Covid-19 concerns, and which is in a good position to have improving fundamental performance regardless of what happens with the virus.” In October, HCA announced third quarter earnings which beat expectations and validated our thesis. We elaborated on that here.

Today, the company announced fourth quarter earnings that again beat revenue and earnings estimates. The company issued positive guidance for 2021, reinstated the dividend, and re-authorized the stock buyback. Finally, free cash flow for 2020 indicates a business that is performing as well as we optimistically expected.

Fourth Quarter:
As we outlined previously, fear of Covid-19 has kept people from seeking much needed medical care. While that trend has reduced hospital volume (same facility admissions down 3.4%, same facility inpatient surgeries down 6.7%, same facility outpatient surgeries down 5.1%), the unfortunate result of people waiting too long to seek care has meant patient acuity has increased (same facility revenue/equivalent admission up 14.1%). Simply stated, fewer people are going to the hospital, but when they get there, they are much sicker and require more care. This trend has meant that while admissions were down, revenue in the quarter was up 5.7%. That increase, plus some good expense control led to earnings per share of $4.13. This was 34% above last year’s number, and beat sell-side analyst estimates of $3.60.

HCA gave 2021 guidance for EPS of $12.10 – $13.10/share. Given that the last 3 quarters of earnings (since the Covid-19 shut-downs) have been $3.23, $3.64, and $4.13, we think that guidance is conservative. To us, it looks like the company is heading for something above $14 of earnings. Sharp-eyed analysts might note that HCA benefitted from holding $6B of government CARES Act funds for part of the year, but on an after-tax basis, interest cost in 2020 was only $.56/share below the 2019 level.

We’d also note that 2020 free cash flow was around $17/share. Even backing out the increase in accounts payable gets to a number around $14/share. We expect that amount of free cash flow would mitigate the temporary benefit of holding government cash in 2020.

Finally, the company is still working through a backlog of high-revenue elective procedures that got delayed in 2020. People worried about Covid-19 were able to delay knee and hip replacement surgeries, but eventually, those procedures will get done as patients develop confidence in hospital virus-control protocols, and the discomfort of delaying surgery gets worse over time.

Dividend and Stock Buyback:
In a show of confidence about the business outlook regardless of high or low Covid-19 infection periods, HCA reinstated the dividend which was suspended early in 2020. The prior dividend was $.43/share and the newly reinstated one is $.48/share.

HCA also suspended its stock buyback in 2020 with remaining authorization of $2.8B. The company has indicated its ready to start repurchasing shares again, and the Board added an extra $6B to buyback capacity.

Debt Levels:
There was some concern on the conference call about HCA’s $29.2B in net debt. Given that the debt is 2.9x 2020 EBITDA and 2.8x the mid-range of conservative 2021 EBITDA guidance, we’re not concerned. In addition, 2020 adjusted EBITDA of $10,037MM was over 6x interest expense. Company free cash flow can more than cover interest on the debt.

The quarter, 2021 guidance, the reinstatement of the dividend, and the resumption of the stock buyback plan all confirm our positive thesis on HCA. We continue to believe that 2021 estimates will need to be raised. Even though the stock has appreciated substantially since we first wrote on the name, we think it still represents excellent value.

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