Healthcare and hospital stocks are attracting capital and attention again as markets get choppy.
The last few years have been poor-performing years for hospitals as many surgeries were canceled in favor of treating patients suffering from the virus. With patients returning for elective procedures, that trend appears to be reversing.
One of the better hospital stocks at the moment appears to be HCA Healthcare (NYSE:HCA) but is HCA a good investment?
HCA Healthcare is a healthcare service provider based in Nashville, Tennessee.
The company’s main business is a chain of general and acute care hospitals that provide a wide range of medical services to both individual patients and larger institutional clients.
HCA also operates laboratories, rehabilitation facilities, surgery centers and various other medical facilities.
Advantages of HCA Healthcare
The single most attractive aspect of HCA is its scale. 182 hospitals make up the HCA Healthcare chain, as well as peripheral medical centers for more specialized types of care.
This broad reach gives HCA a competitive advantage that relatively few other healthcare companies can match and makes it more likely to receive contracts from large payers like state governments.
HCA also has a strong position in two of the fastest-growing states in the union, namely Texas and Florida. As these states continue to attract new citizens with low taxes and ample job opportunities, HCA can expect to capture a large percentage of these new healthcare consumers.
The company’s Q4 earnings call showed some additional reasons for investor optimism. Inpatient revenues were largely flat, rising by only 2 percent. Outpatient services, however, saw a much more robust revenue jump of 13 percent.
Earnings per share were also up by 7 percent, rising to $4.42 per share. This did represent a slight miss against a consensus estimate of $4.55. However, rising earnings coming off of the pandemic show that HCA is likely on track to perform well in the future.
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HCA stock is priced at the reasonable multiple of 14.95 times its trailing 12-month earnings. With the possibility of renewed growth, this makes the stock fairly attractive from a value perspective.
A final reason for investors to consider HCA healthcare comes in the form of its continued plans to expand in the Texas and Florida markets. The company already has plans to add eight new hospitals to its network between the two states.
Further expansion in the coming years could drive considerable new revenues and reward investors who buy at today’s prices.
What Could Go Wrong?
The risks affecting HCA are largely the same ones shared by hospitals all around the US. The pandemic years caused decreases in patient traffic and elective surgical procedures that severely impact hospital revenues.
Large chains like HCA had the resources necessary to survive but still saw wide-ranging impacts as a result. The fact that the stock is still trading near its all-time high in spite of these challenges raises slight concerns about valuation.
It’s also worth considering that subsequent variants of COVID-19 could cause hospitals to experience disruptions again, creating a somewhat rocky environment for healthcare stocks in the short term.
Revenues are recovering nicely at the moment, but the specter of COVID-19 still introduces a degree of uncertainty into the notion of investing in hospital chains.
A larger concern for HCA and the healthcare industry in general is a growing labor shortage among medical professionals. Personnel challenges are now the largest concern among hospital CEOs, showing just how large the gap between jobs and the staff needed to fill them has become. As hospital chains like HCA are forced to raise salaries in order to attract workers, they may find it difficult to offset costs elsewhere.
Some investors might also be concerned by HCA’s inconsistent dividend history. While the company does pay a small dividend, the payments have been anything but regular. Dividends were paid out for all four quarters in 2018 and 2019, but only one time each in 2020 and 2021.
For investors seeking income from their portfolios, this lack of reliability could downgrade HCA stock. With other healthcare companies providing higher and more regular dividends, HCA has to grow quickly enough to outpace its relative lack of yields.
HCA Healthcare Target Price
Analyst target prices for HCA Healthcare give the stock a reasonable if somewhat muted upside over the next 12 months. The median price target is $289.50, up 11.1 percent against the current price.
The high price target would put the stock at $310, a gain of 19 percent. The lowest target places the stock deep into losing territory at $150. At that price, the company would lose more than 40 percent of its present value.
At first glance, it would appear that HCA has far more downside than upside. There are, however, two important caveats to consider. The first is that the low target is an outlier among the 22 outstanding ratings at the moment.
Given that the median is so much closer to the highest price target, it’s much more likely that the stock will see gains than losses over the coming year.
It’s also important to remember that these price targets only take the next year into account. The reason this is so critical in HCA’s case is that the company is likely a better long-term buy.
Even if it doesn’t produce enormous results in the next year, HCA’s appeal is that of a reasonably priced stock in a vital industry that will grow for years to come. In this sense, HCA is a long-term value stock rather than a high-growth stock.
Is HCA Healthcare a Good Investment Right Now?
Taking all of this into account, HCA Healthcare looks to be a fairly good investment at the moment. The company’s scale, exposure to rapidly growing markets and position as a provider of essential services all make it an attractive business. While the stock is by no means oversold right now, the low earnings multiple at which it is priced makes it a decent value.
There are risks for HCA, especially in the form of higher labor costs. However, such costs would affect hospitals across the country, not just HCA. Because of its scale, the company may also be in a better position to ride out labor shortages than smaller hospital groups.
It’s also worth considering the company’s performance prior to the pandemic to get a better sense of where it could go from here. HCA’s 5-year compounded annual growth rate for earnings is over 20 percent, showing an excellent trend of increasing earnings over time.
The company has also produced strong returns for investors, even during the pandemic years. With the healthcare industry returning to something more like business as usual, HCA is likely in a good position to get its revenue growth back on track.
Overall, HCA Healthcare appears to be a strong buy for conservative investors looking for decent gains in the healthcare industry. The company likely won’t produce the kind of enormous gains associated with high-growth tech stocks, but its long-term potential is excellent.
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