Black Book Invite | HCA | New Best Idea Long | Learning to Live with COVID-19

We are moving HCA off the Long Bench and up to a Best Idea Long.  We are seeing evidence of a recovery in medical care nationally, and at the facility level for HCA.  We began looking at HCA as a post-pandemic short because its revenue estimate momentum was slowing, the multiple looks extended, excess pandemic related support is rolling off, and wage pressure looked like it would persist well into 2023.  What we found is a Long. 

SUMMARY

First, the current Quad 4 economic backdrop, slowing GDP and inflation, is a tailwind to medical spending and Health Care stocks broadly, including HCA.  In addition to its own historical Quad 4 performance, HCA ranks highly based on the factors that perform well in Quad 4. Also, throughout the pandemic we've seen the build up of deferred care, which will make its way back into the system as a catch up in volume, higher acuity, or both.  We expect the impact from volume mix moving away from COVID, even with the extra support, and toward deferred and higher acuity care to be a net positive to revenue and margins.

COVID cases are rising again along with hospitalizations and our outlook could all go badly if this developing wave of COVID cases cycles through yet another stretch of suppressed non-COVID care and wage spikes, but we expect with the combination of high vaccination rates and/or a history of Omicron infection, the impact will be low.  If we're right, the incremental revenue and and margin will offset the continuing wage pressure that we expect to persist for some time.  We have seen some signs of wage pressures easing, so if this next COVID wave does fizzle, the scenario could get even better for HCA.

There are risks ahead, but we think we can drive additional revenue and EBITDA to push HCA ~30% higher from here.  We also have the tools to keep a tight leash on how our thesis is progressing, primarily by monitoring daily and weekly volume updates provided by the US Department of Health and Human Services, wage trackers, and monthly macro series updates.  With a Quad 4 tailwind and visibility into operating trends, we like the risk/reward set up here.

If you have questions for us on HCA or feedback, email .

Thomas Tobin
Managing Director


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William McMahon
Analyst


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Justin Venneri
Director, Primary Research


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