Expanding Healthcare Services And Capital Allocation Will Yield Value

Key Takeaways

• Broad-based volume growth and improved operating margins suggest strong potential for future revenue and earnings expansion.
  
• Strategic capital allocation, advanced technology investments, and strengthened managed care positioning are poised to drive long-term value and operational efficiency.
  
• Regulatory uncertainties and increased costs pose risks to HCA's revenue stability and net margins, with concerns about declining surgical volumes and Medicaid changes.

Catalysts

Through its subsidiaries, owns and operates hospitals and related healthcare entities in the United States.

• HCA Healthcare has been experiencing broad-based volume growth across various categories, including inpatient admissions, emergency room visits, and cardiac procedures, indicating potential for future revenue growth as demand for healthcare services continues to rise.
  
• The company has achieved improvements in operating margins, driven by enhanced payer mix, effective cost management, and reduced contract labor usage. These operational efficiencies are expected to support future net margin and earnings growth.
  
• HCA's disciplined capital allocation strategy, which includes increasing facility and bed capacity as well as strategic acquisitions, is expected to drive long-term value creation and support revenue growth by meeting rising healthcare demand.
  
• The company's strengthened managed care positioning, evidenced by improved access to lives and favorable contracting cycles, suggests a positive outlook for revenue per equivalent admission, bolstering potential earnings growth.
  
• Investments in digital tools and technology innovations, such as AI and automation, are expected to streamline operations, enhance clinical care, and ultimately improve profit margins by increasing efficiency and reducing operational costs.

HCA Healthcare Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HCA Healthcare's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 8.4% in 3 years time.
• Analysts expect earnings to reach $7.1 billion (and earnings per share of $33.08) by about May 2028, up from $5.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, down from 14.8x today. This future PE is lower than the current PE for the US Healthcare industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.39%, as per the Simply Wall St company report.

HCA Healthcare Future Earnings Per Share Growth

Risks

• Persistent uncertainty and potential negative impacts of the evolving federal policy environment could affect HCA's business, potentially impacting revenue and earnings.
  
• Regulatory and tariff risks, particularly related to supplies sourced from overseas, remain fluid and could increase operating expenses, impacting net margins.
  
• Increasing professional fee costs, with a significant increase noted from the prior year, may pressure operating expenses, affecting net margins.
  
• Declining outpatient surgical volumes, especially in lower acuity cases, could negatively impact revenue growth if trends continue.
  
• Changes in Medicaid volumes due to the redetermination process and reimbursement issues with the Medicaid supplemental program highlight risks to revenue stability and potential variable impacts on net margins.

Valuation

• The analysts have a consensus price target of $371.839 for HCA Healthcare based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $438.0, and the most bearish reporting a price target of just $316.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $84.2 billion, earnings will come to $7.1 billion, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 6.4%.
• Given the current share price of $356.7, the analyst price target of $371.84 is 4.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.