As the editor of
, I'm a sucker for a smart, profitable company that's able to use
its ability to innovate, dominate and make money. That's why I've
taken an interest in Hospital Corporation of America (HCA), which
is about to launch an initial public offering, or
The sale of stock is expected to be on Thursday, March 10 and
could raise up to $4.2 billion.
HCA is notable as a hospital operator for two reasons. First is
its size: It's the largest in the United States, with some 151
hospitals with more than 38,000 licensed beds.
The second reason, and the focus of this article, is itsbottom
line . HCA is far more profitable than most of its competitors. In
the latest annual results, for fiscal 2010, the company achieved a
, nearly twice the industry norm, as the chart below shows.
A few more facts about this company: It handles nearly 6 million
emergency room visits a year, performs 490,000 in-patient surgeries
and, at any given time, has 20,523 patients in bed, which gives it
an average occupancy rate of 53% and a total patient count of some
1.5 million admissions a year.
Were that the end of the story, you and I would be forced to part
ways at this point. A company with a 5% margin is nice and all,
especially relative to its competitors, but I'm interested in
capturing more serious returns. Show me a business with a 40%
margin and I'm interested. Hey, it's not like that's
impossible -- 10 companies in the S&P 500 do it.
Now, it's one thing for a company like, say,
, to grow fast and huge. But it's quite another to see an
established business with a multibillion-dollar market cap energize
itsearnings and move the needle on its profitability. So I'm always
thinking about which companies might actually be able to pull that
off. When they do, Wall Street is ready to reward them with a
richer stock price.
The market shows us what happens when margins increase. The table
Community Health (NYSE:
has a margin of 2.0% and trades at 13.3 timesearnings .
Universal Health Services (NYSE:
, on the other had, has a 5.0% margin. So to put the
) ratio in different terms, a dollar of Universal'searnings is
worth $17.50 to Community Health's $13.30. That's a 30%
profitability premium. HCA's 4.9%profit margin in 2010 translates
into a fair-market value in today's market of 15 timesearnings , or
about $18 billion.
The point that becomes utterly fascinating to me at this point,
then, is this idea of increasing margin. Is there any factor that
can materially juice a multibillion-dollar hospital
company's earnings ? There is. And we can discover what it is
by looking at three critical areas that all hospitals have on their
The "Provision for Doubtful Accounts" is cash the hospital sets
aside for people who don't pay; "Uninsured discounts" are
reductions in charges made to patients who don't have insurance on
the idea that a hospital would rather get something than nothing.
Finally there's "Charity Care," medical services the hospital gives
away. All of these elements detract from thebottom line
Take a look at HCA:
These numbers are important because of recent changes in federal
law. ObamaCare mandates everyone have insurance. And when that
happens by 2014, hospitals won't need to set aside money for
doubtful accounts, give a discount to uninsured patients or give
away charity care. Why? Because everyone will be covered.
This means we would need to revise theincome statement for HCA's
2010 results. The revised results would look like this:Net earnings
of $1.2 billion plus add-backs of $9.6 billion, for revised
of $10.8 billion and a margin of 35.3%.
Hospitals really are not a low-margin business. They just look like
one because one of all the unpaid accounts. The fact of the matter
is that Google,
would all see their fat margins shrink dramatically if a third of
their customers didn't pay. So an entire sector of theeconomy --
one of the few industries that always grows -- rightfully earns a
35% margin but is forced to accept 2% or 5%. ObamaCare -- some
would argue -- fixes that, dramatically.
Action to Take -->
Is HCA a good buy? Overall, I'd say investors can typically expect
to be rewarded by the largest and best-managed players in any
industry. HCA fits the bill in this case.
[So, given the federal law and what it could mean for the potential
revision of hospital margins, are the leading hospital operators
Fast-Track worthy? Nah.
is for the big winners. But don't worry. My portfolio still has
some great health-care stocks in it.
Want to know my best health care picks? Hey, find out. Those
companies are already in the
Go here to find out more
Disclosure: Neither Andy Obermueller nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.
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