The Morning Monte


HCA (HCA) Wednesday, August 5, 2015

Published: 8/21/2015 10:10:11 AM UTC

HCA Holdings, Inc (NYSE: HCA) reported Q2 2015 earnings on August 5.  The company recorded EPS of $1.18 ($1.37 on a non-GAAP basis) on $9.9 billion in revenue.  These narrowly exceeded analyst estimates of $1.35 of non-GAAP EPS and $9.83 billion of revenue.  Shares dropped 7% following earnings before gaining back some losses, as investors interpreted results and management comments as signals that the benefits from the Affordable Care Act had plateaued.  Analysts are still largely bullish and have attributed recent results to temporary factors.

Prudena's models indicate that the market may have overreacted.  Given analyst expectations and a longer term view of a modest slowdown, the current market price falls at the low end of likely values output from a residual earnings model.  The market is implying long term growth in-line with GDP, which assumes no more ongoing gains from demographic trends, reduction in the number of uninsured consumers, and growing disposable income.  

Value Breakdown

Assuming 8% required rate of return, the current market price of $88.57 implies 0.65% long term residual earnings growth rate for HCA.  This is extremely low, especially given the likelihood of high ROE in coming years due to the current negative book value.  Prudena's residual earnings model estimates a most likely value per share of $98.80.  This model assumes that analyst estimates are accurate over the five year horizon, followed by a period of mid to high single digit revenue growth.  A Monte Carlo simulation, which takes a range of inputs for the residual earnings model, calculates a most likely value of $99.77 for HCA.  The Monte Carlo simulation outputs a possible range of $87.50 to $111.55.  The current market price is approaching the low end of this range. 

Value Probability Distribution

Conclusions ...

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NOTE: The Morning Monte is high-level, and any investment requires a deeper analysis than is presented here. The comments in the Morning Monte are intended to help guide your research and ground you in the fundamentals of the company. In no way should the comments in The Morning Monte be taken as advice to buy or sell a particular equity. Some of the statements are forward looking. As such, these statements are speculation--so beware! The comments represent the views of the author and are not necessarily the views of PRUDENA™.

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About HCA

HCA Holdings, Inc. (NYSE: HCA) is a health care healthcare facility operator. The company provides health care services through a network of hospitals and surgery centers. As of June 30, 2015, HCA operated 168 hospitals and 112 surgery centers. The company also owns and operates diagnostic and imaging centers, radiation and oncology centers, and physical therapy centers.  HCA provides 4%-5% of the total inpatient care in the US. The company invests approximately round $1.5 billion annually in facility upgrades.

HCA Holdings' net revenue totaled $19.57 billion during the six months ended June 30, 2015, a 7.2% year-over-year increase.  Revenue growth is generally a function of inpatient occupancy level and auxiliary service volume.  62% of revenue was generated by private plans, uninsured and other customers in Q2 2015.  Government programs contributed the remaining revenue.  Geographically, roughly 47% of the company's revenue is concentrated in Texas and Florida. HCA Holdings, Inc. was founded in 1968 and is headquartered in Nashville, Tennessee.