HCA Healthcare: Aggressive Share Repurchases to Drive Shareholder Value

Jim Zimmerman of Lowell Capital Management presented his in-depth investment thesis on HCA Healthcare (NYSE: HCA) at Best Ideas 2018.

HCA is the largest for-profit hospital company in the U.S. It is essentially a modestly leveraged LBO of a stable, non-discretionary business with strong cash flows and deeply entrenched competitive positions in some of the most attractive local markets in the U.S. HCA has 177 hospitals located in some of the fastest growing and most attractive geographic markets, with average share of ~25% in those local markets. Only about 2% of HCA’s admissions are exchange patients under the ACA/Obamacare and only about 5-6% of EBITDA. HCA is the most efficient and lowest-cost operator in the for-profit hospital industry, which should enable it to deal effectively with changes in government payment programs or reimbursement rates. Healthcare is a less discretionary expenditure, as was made clear by strong results in the Great Recession, when HCA was more leveraged (net debt to adjusted EBITDA of about 6x versus 4x recently). It is difficult to open new hospitals, which require a Certificate of Need (CON). The number of hospitals in the U.S. has declined over the past twenty years while the U.S. population has increased, and almost 80% of hospitals in the U.S. are less competitive non-profit or government-owned hospitals.

HCA has a cash-generative business model and opportunities to deploy capital to make the moat stronger. HCA also has one of the strongest balance sheets in the industry, with net debt to adjusted EBITDA of ~4x. HCA is aggressively repurchasing shares to drive shareholder value, with shares outstanding reduced from 496 million at yearend 2011 to 360 million as of 3Q17, a reduction of 27%. HCA trades at multiples of ~7.8x adjusted EBITDA and ~13x EPS. Jim expects HCA to repurchase 20 million shares annually in 2018, 2019, and 2020 and end 2020 with shares outstanding of ~300 million. HCA has grown adjusted EBITDA at close to 6% annually from 2011 to 2016, from $6.1 billion to $8.2 billion. HCA is an important part of the U.S. healthcare industry, with ~5% of U.S. patients serviced in HCA’s extensive network of hospitals and outpatient facilities. Based on 8x Jim’s estimated adjusted EBITDA of $9.5 billion for 2020, with net debt of ~$31 billion outstanding at yearend 2020, HCA could trade for an EV of close to $76 billion or a market cap of $45 billion. Based on 300 million shares outstanding estimated by yearend 2020, this would imply a share price of ~$150 per share or 70% higher than the recent price of $88 per share.

About the instructor:

Jim Zimmerman is founder and portfolio manager of Lowell Capital Value Partners, LP, successor fund to Lowell Capital Fund, L.P. Mr. Zimmerman managed Lowell Capital Fund L.P. from 2003 to 2015 employing a proprietary strategy laser-focused on smaller and/or misunderstood companies with large, sustainable free cash flow yields and “Ft. Knox” balance sheets. He generated a compound annual return significantly exceeding the HFRI Equity Hedge Index and the S&P 500 Total Return Index over this period, despite holding a significant net cash position (~30%) for most of this period. He has over 25 years of investment banking and investment management experience in a variety of industries and has been involved with several billion dollars of investments. He has been a member of the invitation-only Value Investors Club for over 10 years, contributing detailed investment write-ups on 35 companies to date which have produced an average return exceeding 50% per investment. He has built an extensive network of relationships with value-oriented investment groups and activists. Mr. Zimmerman graduated with a BA with high honors in economics from Princeton University in 1980 and an MBA from Stanford Business School in 1984. He worked at Drexel Burnham Lambert, Inc., 1984 to 1990, serving in the Corporate Finance Department and multiple other investment banks from 1990 to 2003. He is a close follower of Warren Buffett and his investment approach.

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