HCA Healthcare Rides On Acquisitions, Weak Volumes Bother

HCA Healthcare, Inc. (NYSE:HCA) , one of the most diversified hospital companies in the United States, has achieved growth via a number of acquisitions made over the past many years.

Since its IPO in March 2011 and through the second quarter of 2017, the company spent more than $4.4 billion on acquiring a number of hospitals.

The company is due to acquire two hospitals from Community Health Systems.

These deals have led to an increase in 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.

These purchases are backed by HCA Healthcare’s strong balance sheet and consistent increase in cash flows for a number of years. These also provide room for shareholder-friendly capital deployment through buy backs and dividend payouts.

The company’s superior performance is reflective in its share price performance which has gained 5.9% year to date compared with the industry’s growth of 4.2%.

Nevertheless, the company’s commercial business has recently been facing challenges from declining volumes of admissions. Its international business is also under pressure due to decline in admissions in Middle East and London.

Driven by weakness in business volumes which is expected to persist in the coming quarters, the company narrowed its earnings guidance. It expects adjusted EBITDA of $8.35 billion to $8.5 billion (versus the previous expectation of $8.4 billion to $8.7 billion) and earnings per share of $7.00 to $7.30 for 2017 (versus $7.20-$7.60 expected earlier).

The hospital industry is suffering from low admissions as patients are increasingly choosing to stay away due to high out-of-pocket (which shift the initial costs to patients) costs. Also, a pullback of insurers from public exchanges has increased the uninsured rate which in turn is hurting the company. Given the continued uncertainty about the future of Obamacare, the present scenario is likely to continue in the quarters ahead and drain business volumes.

Other players in the industry like Community Health Systems Inc. (NYSE:CYH) and United Health Services, Inc. (NYSE:UHS) are also victims of political uncertainty.

Universal Health missed second-quarter earnings estimates and cut its 2017 earnings guidance. Community Health incurred a loss in the second quarter and reduced its 2017 earnings guidance.

Zacks Rank & Stock to Consider

HCA Healthcare carries a Zacks Rank #3 (Hold). A better-ranked stock in the health care space is Medpace Holdings, Inc. (NASDAQ:MEDP) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Medpace surpassed earnings estimates in three of the last four quarters, with an average positive surprise of 9%.

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