The hospital industry is witnessing growth in demand for its services owing to a huge baby boomer population, diminishing unemployment, higher disposable income, economic strength, rising prevalence of chronic disease and increase in insured population.
Although rise in high deductible insurance plans, growing efforts to reduce unnecessary hospitalization, greater use of chronic disease management programs and a shift toward outpatient treatment have pushed down demand for hospitals services, the industry’s prospects remain bright.
One promising stock in this space is HCA Healthcare, Inc. (HCA - Free Report) . The company posted strong second-quarter results and gave a promising earnings outlook. Its stock has been witnessing upward estimate revisions, reflecting analysts’ optimism in its future prospects. Over the last 30 days, the Zacks Consensus Estimate for 2018 and 2019 jumped 4.5% and 4.8%, respectively.
Shares of this Zacks Ranked #1 (Strong Buy) company, have gained nearly 57.3% in a year’s time, outperforming the industry's increase of 34%.
5 Reasons Why HCA Healthcare is an Attractive Buy
2018 Guidance Raised: Following the strong performance in the first half of 2018, the company raised its guidance for 2018. The company now expects revenues of $45.5-$46.5 billion, up from the previous projection of $45-$46 billion, and adjusted EBIDTA of $8.65-$8.85, up from the prior guidance of $8.45-$8.75 billion. EPS is expected between $9 and $9.40. The company’s capital expenditures are likely to be around $3.5 billion.
Consistent Growth in Top Line: HCA Healthcare has sustained growth for long. Its revenues witnessed at a five-year (2012-17) CAGR of 5.7%, backed by an increase in same facility admissions and equivalent admissions, same facility emergency room growth and surgical growth. The same increased 7.4% in the second quarter of 2018. We expect the trend to continue, given the company’s efforts to enter large, fast-developing urban markets with growing population in constant need of its services.
Acquisitions Fueling Inorganic Growth: HCA Healthcare has been emphasizing acquisitions for expedited growth. These deals have led to an increase in the number of hospitals in terms of patient volumes and enabled network expansion across several markets. The company’s acquisitions are expected to add scale to its business, positioning it better to weather the regulatory uncertainty in the healthcare sector. HCA Healthcare expects 2017 acquisitions to contribute roughly 70 to 100 basis points to growth in 2018.
Strong Balance Sheet: HCA Healthcare’s balance sheet and cash flows (the company has consistently generated increased free cash flow for the past several years) are impressive and offer the potential for accretive mergers and acquisitions alongside shareholder-friendly capital deployment through buybacks. Beginning this year, the company has also initiated the payment of dividend, which makes it further attractive to investors.
Capital Expenditures to Bring Growth: In January 2018, it announced plans to increase its three-year capital expenditures program to pursue growth opportunities in its existing markets. The new capital investment program is expected to be of roughly $10.5 billion, up from the previous three-year spend of nearly $8.2 billion. In the same month, HCA Healthcare also initiated a quarterly dividend of 35 cents per share to be paid on Mar 30, 2018. Cash flow from operations increased 12.7% year over year in the second quarter of 2018.
The stock has enough runway for growth from its inorganic and organic growth capabilities, solid cash flow generation and strong macro conditions in its key markets. Also the stock carries an impressive Value Score of A. Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 or 2 offer the best opportunities in the value investing space.
Other Stocks to Consider
LifePoint Health, Inc. (LPNT - Free Report) has a Zacks Rank #2 (Buy). The expected earnings growth rate for the current year is 25%. The Zacks Consensus Estimate for the current year has improved 5.8% over the last 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
UnitedHealth Services, Inc. (UHS - Free Report) carries a Zacks Rank of 2. The expected earnings growth rate for the current year is 26%. The Zacks Consensus Estimate for the current year has improved 0.96% over the last 30 days.
Tenet Healthcare Corporation (THC - Free Report) carries a Zacks Rank of 2. The expected earnings growth rate for the current year is 93%.
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