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4 Reasons Why HCA Holdings (HCA) is an Attractive Choice

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Though the hospital sector doesn’t look attractive at the moment given its weak industry fundamentals and an uncertain policy environment under Trump administration, HCA Holdings Inc. (HCA - Free Report) still remains a solid bet owing to its vast scale, operational strength and strong cash flows.

HCA Holdings’ shares gained 27% in the past one year, surpassing the Zacks classified Medical Hospital industry’s increase of 15.1% in the same time frame.

The company’s outperformance was driven by decent quarterly results and a vast diversified profile which gives it an edge in the industry. Other players in the same industry such as Life Point Health Inc. and Universal Health Services, Inc. (UHS - Free Report) recorded gains of 3.43% and 15% respectively while Community Health Systems Inc. (CYH - Free Report) declined by 35.9% in the same time frame.

Below, we have discussed some of the key reasons which makes this stockan attractive pick:

Rank & Earnings Surprise Record: HCA Holdings’ carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. This hospital company has been consistent in surpassing earnings expectations. It has exceeded expectations in nine of the last 10 quarters, with an average earnings surprise of 10.2% in the last four quarters.

For 2017, revenues are expected in the range of $43–$44 billion, up nearly 5% year over year while adjusted EBITDA per share is forecast in the range of $8.40–$8.70, up 4% year over year. Adjusted earnings per diluted share are projected in the range of $7.20–$7.60 per share. Capital expenditure is anticipated to be approximately $2.9 billion. The company’s guidance reflects continued volume growth, reasonable pricing and well-managed expense growth. Further, its earnings estimates for 2017 have gone up by 3.4% in the past 30 days.

Top-Line and Bottom-Line Growth:  The company’s revenues have grown at a CAGR of 7.2% between 2010 and 2015, and are expected improve further by 4.6% in 2016. The top-line growth was driven by an increase in same facility admissions and equivalent admissions for nine consecutive years, same facility emergency room growth for ten consecutive years, and surgical growth for three consecutive years. The company’s strategy of investing capital has generated growth and will continue to do so going forward. Moreover, its earnings have secularly grown since 2013, with an average growth rate of 30% in the 2013-2016 period.

Strong Balance Sheet: HCA Holdings’ cash flows have been increasing for past many years. Moreover, its balance sheet remains solid and helps investment in accretive mergers & acquisition as well as share buybacks.

Valuation Looks Reasonable: HCA Holdings has a Value Style Score of ‘B’. The Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount.

The company is currently trading at a trailing 12-months P/E multiple of 12.6x, while the industry’s average stands at 24.1x. Moreover, its forward P/E also stands lower at 15.45x compared with the industry’s average of 18.64x.

The PEG ratio is also an important indicator as this metric looks to show investors how much they are paying for each unit of earnings growth. HCA Holdings’ here too seems to be impressive as its PEG stands at 1.32 while the industry’s average is at 1.94.

All these ratios deem the company undervalued in comparison with industry peers and indicate a good time to buy.

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