HCA Holdings’ (NYSE:HCA) network of 163 hospitals makes it the largest publicly held American pure-play hospital company, with a market capitalization of $11.5 billion. HCA IPO’d in March 2011 and after having dropped in price over the next several months has risen 21% this year. Contributing to this rise was its strong Q1 earnings report, in which earnings came in at $1.18 per share versus expectations of 94 cents; this was the third quarter in a row in which the company had beaten earnings by at least 20%. In addition, the upholding of the federal health reform bill has boosted hospital stocks as it removed concerns that the bill would be altered to reduce the expansion of various forms of health insurance coverage; hospitals stand to gain from the fact that it will be easier to get paid for treating the class of patients who is currently uninsured. HCA rose 10% on heavy volume on the day of the Supreme Court decision.
The company’s last 10-Q, for the first quarter of 2012, reported a 13% increase in revenues and a greater than 100% increase in earnings per share compared to the first quarter of 2011. Revenues rose among all classes of patients, led by both Medicare and managed care providers, and in all geographies, led by the Southwest region. Both of these trends reflect demographic changes in the U.S., and so should continue in the future. HCA Holdings now trades at an attractive arsenal of valuation multiples: 5 times trailing earnings, 7 times forward earnings estimates, 6.4 times trailing EBITDA, and a five-year PEG ratio of 0.7. By any textbook definition it would be a value stock, and as noted its earnings growth in its last quarterly report was strong.
Given these statistics, it should be unsurprising that there is a good deal of hedge fund ownership of HCA Holdings. Glenview Capital, managed by Larry Robbins, reported owning 7.8 million shares of the company at the end of March, a small decline from what the fund had owned at the beginning of the year (find more of Glenview Capital's favorite stocks). John Griffin’s Blue Ridge Capital (Griffin used to be a top lieutenant of Julian Robertson) increased is position to 7.6 million shares (see more stock picks from John Griffin). David Einhorn’s Greenlight Capital was also an investor in HCA, owning 4.2 million shares.
HCA Holdings has a number of smaller peers in the hospital industry. Universal Health Services (NYSE:UHS) trades at similarly low multiples: P/E ratios in the high single digits, 6 times trailing EBITDA, and a five-year PEG of 0.6. It also saw an increase in earnings in its last quarter, but not as large as HCA did. Community Health Systems (NYSE:CYH) also has multiples in that range. Tenet Healthcare (NYSE:THC) carries the slight difference that its trailing earnings are not very good, pushing its P/E up to 51, but sell-side analysts expect it to fall in line with the other hospital companies and the rest of its valuation metrics reflect that. Finally, the $1.9 billion market cap Lifepoint Hospitals (NASDAQ:LPNT), while still squarely in value territory on an absolute level, is priced a bit more for growth compared to these other peers with P/E ratios in the 10-11 range and a five-year PEG of 1.2. We’d note that there are slight differences in the mix of services that these companies provide- for example, Universal Health Services has a substantial business unit focused on behavioral health centers, Community Health Systems has a secondary business unit that manages home health care agencies, Tenet has a number of locations focused on diagnostic imaging, and Holdings and Lifepoint seem to be more pure-play standard hospital companies. Given the similarities in valuation, then, an investor could determine which if any of the secondary segments of health services is the most attractive opportunity and pursue the appropriate company. In our case, we would go with the more mental health-driven “behavioral health” operations as having the strongest high-margin growth prospects and pick Universal Health above the rest, but any of these companies look attractive from a value perspective.