HCA Healthcare Grows On Buyouts, Commercial Business Bothers

HCA Healthcare Inc. (NYSE:HCA) , one of the most diversified hospital companies in the U.S. was still recently known as HCA Holdings. Its new name became effective earlier this month.

The company has made a number of acquisitions since its IPO in 2011 to surge in business.

The company’s superior performance is reflective in its share price performance which has gained 7.7% over past one year, compared to a loss of 1.5%, sustained by the Zacks categorized Medical Hospital industry.
The company has also been an outperformer in the industry, evident by negative returns of 36.6%, 20.5%, 10.2%, sustained by its competitors like Tenet Healthcare Corp. (NYSE:THC) , Community Health Systems Inc. (NYSE:CYH) and Universal Health Services Inc. (NYSE:UHS) respectively.

Since its IPO in Mar 2011 and through the second quarter of 2016, the company spent more than $4 billion on acquisitions and has purchased a number of hospitals. It invested $576 million, $351 million, $766 million and $481 million for acquisitions of hospitals and health care entities during 2016, 2015, 2014 and 2013, respectively.

Recently, HCA Healthcare announced the signing of definitive agreements to acquire three Houston area hospitals from Tenet and two Texas hospitals from Community Health Systems, one in Tomball on the north side of Houston, and one in Jourdanton. These facilities will strategically complement these markets and enhance the company’s ability to meet the medical needs and improve patient-access to its provider networks in both communities. These transactions are expected to close sometime in the summer of 2017.

Also the company closed on a 231 (acute care hospital) in Waycross, Georgia, which should complement its Jacksonville market. Also in April, the company announced the signing of a Letter of Intent to purchase Memorial Health in Savannah, Georgia, a not-for-profit acute care hospital with 604 beds.

Memorial Health is the only provider in the market for Level 3 PICU and NICU services, plus Level 1 trauma services. This should significantly strengthen its position along the Atlantic Coast from Jacksonville to Charleston. The acquisition is likely to close by year end.

These four transactions are expected to add seven hospitals with over 2,000 beds and approximately $1.5 billion in new annualized revenues to the company.

Nevertheless, the company’s commercial business faces challenges with declining volumes of admissions recently. Management attributed the weakness in commercial volumes to two reasons. First, overall commercial demand in their markets has slowed down compared to the levels from 2014 till first-quarter 2016, driven by lower exchange volumes, leap year effect, economic issues in a couple markets and less tourism traffic in two of its large markets -- Texas and Florida.

Also, management indicated an increase in competitive pressures driven by more supply across various patient settings, payer dynamics in certain Texas markets and competitors regaining their network status in certain payer contracts.

The company witnessed a decline of commercial volumes in south Florida, Houston, West Florida, Orlando and Las Vegas. It has undertaken remedial measures by building up local networks and creating greater patient-access both from outpatient facilities and digital media standpoints. Coupled with service line, care coordination and physician development initiatives, the company’s overall efforts are required to compete effectively in the said segment.

HCA continues to believe that demand for their commercial business will increase 1-1.5% per year. We, however, remain cautious about its growth over next few quarters.

HCA Healthcare carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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