As an investor, what do you do with a company whose core business is slowing and has low quality assets?
Simple. You sell it. That’s the gist of our Healthcare analyst Tom Tobin’s outlook for HCA Holdings (HCA).
HCA, the $28 billion hospital operator, is typically thought of as “the best house in a bad neighborhood.” The stock reflects this. In what was a very trying year for the Healthcare (XLV) sector (it’s the worst performer in the S&P 500, down -4% year-to-date) HCA has managed to rise 9%.
In the video above, Tobin explains why he thinks the move is overdone:
“We hear a lot about HCA being the best operator. We already have a reasonably bearish view on healthcare relative to the S&P 500, on volume overall, on spending in the aggregate for 2017 and beyond as we taper out of this ACA period with massive government stimulus and increase in insured medical consumers. But we really wanted to try to look deeply at what could save HCA. What could be the upside scenario for the best operator.”
Even being generous, from a modeling perspective, Tobin had a tough time finding positives but found plenty of negatives:
- Business Growth Slowing: “We think there’ s coming pressure on admissions growth with and without the ACA pressure.”
- Troubling Demographics: “Actually the underlying demographics of their core markets where their facilities live is pretty weak. It’s going to cause some payer mix problems going forward.”
- Cost Management Difficulties: “We see they have fairly compressed net pricing and cost per admission. As volume slows we think that’s going to be an incremental problem for the to find additional cost savings.”
- Low Quality Assets: “We think the quality of the assets is generally lower than is perceived, particularly as we mark it up against the number one, two and three competitors.”
- #ACATaper: “The negative effects of the ACA reforms are negative.”
What’s the catalyst to send the stock lower?
“I do think that, in the fourth quarter or first quarter in the annual guidance, somewhere in that six months that they’ll be giving up the ghost. I don’t see how they can talk positively about 2017 and by default 2018.”
BOTTOM LINE: Tobin sees 30% downside in HCA at today’s prices.
