THE HEDGEYE EDGE
HCA Holdings (HCA) is one of our top short ideas related to our #ACATaper theme, which calls for a material slowdown in the US medical economy through 2017 as consumption patterns among the newly insured revert back to baseline levels. There is sufficient evidence, in our view, that the Affordable Care Act provided much of the acceleration the US Medical Economy saw in late 2014 and through most of 2015.
At the end of 2Q16, HCA guided revenue and EBITDA lower for 2016 and we expect same-store adjusted admissions to continue trending lower through year-end. We believe the deceleration in same-store adjusted admissions volume at HCA has more to do with "slowing in demand growth to more normal rates" rather than the other reasons raised by management.
There is sufficient evidence, in our view, that the Affordable Care Act provided much of the acceleration the US Medical Economy saw in late 2014 and through most of 2015. At the end of 2Q16 HCA guided revenue and EBITDA lower for 2016 and we expect same-store adjusted admissions to continue trending lower through year-end.
We believe the deceleration in same-store adjusted admissions volume at HCA has more to do with "slowing in demand growth to more normal rates" rather than the other reasons raised by management. We are considerably more negative on what "normal" means given the extremely abnormal period we have been in over the last 10 quarters.
Between a decline in the multiple and lower EBITDA, we think we will see a stock price in the $50s over the next 6-12 months.
INTERMEDIATE TERM (TREND)
We are expecting declines in adjusted admissions over the next several quarters that will drive revenue and EBITDA misses potentially into the double digits. We have drawn specific conclusions from the deceleration in insured medical consumers and lower per capita spending for the newly insured that we believe is reflected in the JOLTS data.
LONG TERM (TAIL)
When the medical economy rolls over, it’s hard to cut staffing fast enough in Hospitals. The incremental margin depends largely on how prepared management is for the trend. Also, HCA's state-weighted maternity trend has been in decline for several months, driven primarily by Texas and what we assume is an energy economy related pressure. While Florida has been slowing, it appears likely that the ZIKA virus scare will put incremental pressure on HCA's trend in Florida. It should be noted that these two states make up more than 50% of HCA’s total beds.
ONE-YEAR TRAILING CHART
