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hca and the future of healthcare stocks

By Aidan Asbill, Equity Analyst


As we discussed in the last article, HCA Healthcare signed a huge deal with Google cloud to utilizes Google’s new data and analytics to bring the hospitals into the future. Many hospitals chains have been slow to adapt to the digital age, with many still using slow and archaic records systems. HCA’s partnership with Google is looking to change that with Google’s innovative use of information technology to create a digital transformation within the company.

This partnership is a win-win for both companies, as Google gets a chance to prove its innovative cloud technology and HCA gets to be brought into a new digital age as the company tries to expand the capabilities of its existing hospital structure. With more than 2,000 sites in 20 states, HCA has established itself as a major hospital chain, ranking No. 67 in 2019 in the Fortune 500. Google is slowly starting to unveil the possibilities that cloud technology can have in healthcare and HCA seeks to benefit from this greatly as they collect data from 32 million patient visits per year. This patient data can help Google fine-tune their cloud computing for healthcare and allows the company to prove their technology in the healthcare sector. HCA gets to take advantage of Google’s innovative cloud technology, which should hopefully allow HCA to create analytic platforms that can better assist their patients. With this partnership, HCA and Google both hope to increase the efficiency of their hospital chains systems, which in turn means more profits. However, HCA wasn’t always a powerhouse in the health care industry and they were met with many setbacks on their way to the top.

HCA Healthcare’s Controversial Past

Hospital Corporation of America (HCA) is a for-profit owner of health care facilities that was founded in 1968 in Tennessee. HCA started with 11 hospitals during their first IPO in 1969, but this would quickly change as the company aggressively expanding in the Health Care industry throughout the 1970s. By 1981, in a little over a decade, the company was operating 349 hospitals, with operating revenues of $2.4 billion. HCA’s rapid expansion into the Health Care sector continued and by 1986 the company was operating 463 hospitals. With this massive success, HCA looked to grow even bigger when it merged with Columbia Hospital Corporation in 1994. However, the company hit its first stint with controversy when in 1997 the FBI and IRS conducted a federal investigation on the company. Amidst the controversy, the CEO at the time, Rick Scott, was forced to resign amongst evidence that the company was falsifying its books to show more expenses than were actually listed. Thomas Frist, a co-founder of HCA was tasked with fixing the mess and returning to the company as a CEO in 1997. In 2003, HCA and their partner Columbia plead guilty to 14 felonies and admitted to overcharging the government, and the company was ordered to pay $2 billion in fines for defrauding the federal health care programs. This is still to this day considered the biggest case of healthcare fraud in U.S history. Unfortunately for HCA, the company found itself in even more controversy in 2005 when Senator Bill Frist, brother of the former HCA CEO, sold all his HCA shares 2 weeks before disappointing earnings. This opened up a huge insider trading scandal as shareholders had claimed the company gave false revenue numbers to drive up the price. Senator Frist claimed he sold his shares as he was running for president and didn’t want a potential conflict of interest, however, it was later found out that 11 other HCA senior officers also sold at this same time. HCA later settled the lawsuit in 2007, paying out shareholders $20 million, but the company refused to admit to any insider trading. With so much controversy surrounding the company, HCA would have to make some big moves to get back on track.

HCA’s Big Comeback 

HCA was at a critical point, with the company spending billions in fines, as well as countless controversies, the company needed to make a big move to turn things around. In 2006, HCA made that move when it became a private company for the third time by completing a blockbuster merger by a private investor group that included the likes of Bain Capital, Merrill Lynch, and the original co-founders of the company. Going back to a private company proved to be very lucrative for the company, with the total transaction valued at approximately $33 billion, making it the largest leveraged buyout in history at the time. By going private the company was able to re-evaluate things moving forward and more importantly raise a massive amount of money while doing it. However, this adjustment period didn’t last very long with HCA announcing it would go public again in 2010. In 2011, the company went public with a $4.6 billion IPO as HCA Holdings. The company sold 126.2 million shares for $30 each, which netted them close to $4 billion dollars. HCA had finally regained its footing.

This period of time would be pretty uneventful for the company. With all the controversies, the company made no new mergers or acquisitions between 2003 and 2017. With that being said, the healthcare giant would change this in 2017 when it acquired the Memorial University Medical Center in Savannah, Georgia. That same year it would acquire 3 more hospitals in Houston from Tenet Healthcare. The company continued its aggressive acquisitions in 2019 when the company purchased Mission Health System, a hospital chain out of North Carolina with 12,000 employees for $1.5 billion. Now most recently, the company bought an 80% stake in Brookdale Senior Living Inc for $400 million. Brookdale is the largest operator of senior housing in the United States, with over 700 senior living and retirement communities. This merger will add 57 home health agencies, 22 hospice agencies, and 84 outpatient therapy locations to HCA healthcare extensive healthcare portfolio, in a market of seniors who are in desperate need of quality care. This deal will extend HCA’s reach beyond hospitals, surgery centers, and allow them to expand into the lucrative home health sector. With over 70% of healthcare spending coming from people ages 50 and up, this deal can be very impactful for the company’s revenue growth for the future. With the company’s willingness to expand into new markets through acquisitions, HCA’s aggressive mindset gives the company interesting future potential. 

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HCA & The Future

HCA healthcare has gained traction very quickly, with the stock up 162% since March last year and up 30% this year. However, with the company’s partnership with Google and their aggressive acquisitions, the company may still have room to grow. This sentiment may be even more true when looking at HCA’s strategy of reaching expanding into new markets through acquisitions.  In 2020, the company spent over $500 million on acquisitions that will expand its market share, as well bought a 40% interest in a telemedicine company as well. The company’s aggressive acquisitions will be great for future revenue growth by expanding their hospital chains into new markets. However, these acquisitions have also greatly increased HCA’s debt which was as high as $35 billion in 2019. Since then the company has taken great measures in order to relieve some of this debt by offsetting some assets to pay off its debt. The company agreed to sell Redmond Regional Medical Center, GA to advent health for $635 million, as well as selling four more of its hospitals in Georgia for nearly $950 million. These efforts helped the company alleviate its debt significantly, with the company’s debt now at $31 billion, down nearly $4 billion. The company only increased its year-to-year revenue by 0.38%, however, its net income was up 7% from 3.5 billion in 2019 to 3.75 billion in 2020. Most impressive though, the company was able to nearly triple its cash on hand from $620 million in 2019 to $1.8 billion in 2020. The company has averaged an impressive 8.6% revenue growth over the past three years, but these revenue numbers may be unsustainable for the future. This year HCA is expected to bring in $54-55.5 billion in revenue, which would be a 4.7-7.7% increase from last year’s revenue of $51 billion.  These numbers won’t wow investors, but with that being said the company has a 15.34% operating margin, which ranks it in the top 85% of the industry. 

HCA may have growth concerns in the short term, as its revenue begins to lag, scaling the company further may prove to be difficult. However, when looking at HCA’s long-term growth, things may change. The company’s deal with Brookdale Senior Living came at a perfect time as the demand for high-quality health care is at all times highs after Covid-19. According to Statista, the American population aged 65 years or older accounted for around 16.5% of the total population in 2019. This percentage is likely to increase as the aging population is expected to make up 22% of the total population by 2050. The healthcare sector has also seen a shift in consumers opting into outpatient procedures for their lower cost. The demand for inpatient care has gone down significantly with the national occupancy rate for hospitals declining from 77 percent in 1980 to 61 percent today, putting pressure on margins. With healthcare spending being strongly linked with age and the U.S. senior population growing steadily, demand for outpatient care can drive more cost-conscious consumers to opt into outpatient facilities. With 84 outpatient therapy locations included in the Brookdale merger, this will be a great way for HCA to extend their revenue streams outside their hospitals.

Should you buy the stock?

HCA has proven to be a healthcare giant in the industry that has weathered many storms. The company’s aggressive acquisitions have allowed the company to stay competitive and ahead of the competition and at the same time, the company has managed to impressively reduce debt while doing so. With that being said, there may be some concerns about lagging revenue growth as HCA may struggle to scale revenue to new heights, with how big the company has gotten.

On the high end, HCA could make an estimated 7.7% increase in year over revenue, however, on the low end, the company will only make 4.7% which is nearly half of what it has averaged over the last 3 years. The stock has already gone up significantly and much of the value of their partnership with Google and Brookdale Senior Living may already be priced into the stock today, which may not appeal to today’s short-term investors. With that being said, the company’s long-term growth is very intriguing, with HCA proving to be at the forefront of aggressively expanding its revenue through acquisitions. With life expectancy going up every year, and HCA expanding its revenue streams, the company may be able to expand its revenue growth to new highs in the future. The company is also very early on with their Google Cloud partnership and if Google’s innovative dynamic data analytics platform can live up to the hype, this may serve to further reduce costs and increase the company’s net income. HCA healthcare management has done an excellent job in preparing the company for the future demand for high-quality healthcare, but it will be up to investors to determine if they will become the future of healthcare.

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