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Comparing HCA Holdings with peers

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Comparing performance

Healthcare companies, represented by the Health Care Select Sector SPDR ETF (XLV) generally carry high debt on accounting balance sheets. Hence, we use the forward-looking best enterprise value to best earnings before interest, taxes, depreciation, and amortization (or best EV/best EBITDA), developed by Bloomberg, to analyze HCA Holdings and its peers.

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The graph above shows that HCA Holdings (HCA) traded between 5.0x and 7.2x best EV/best EBITDA since the stock went public in April 2011. From January 2013, Universal Health Services (UHS) has traded higher than HCA Holdings, while Tenet Healthcare (THC) and Community Health Systems (CYH) have traded close to HCA Holdings.

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Tracking fundamentals

The difference between the valuations can be explained by the difference in return and risk profiles of the companies.

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HCA Holdings performance

HCA Holdings has been one of the top performers in the industry, along with Universal Health Services, in terms of EBITDA margins. However, the valuation multiples of HCA Holdings are depressed when compared to that of Universal Health Services. This discount can be attributed to the negative equity and risk of legal penalties that the company faces. Also, with insiders gradually reducing their holdings in the company, investors continue to be uncertain about HCA’s future performance.

The strategy of focusing on emergency care, urgent care, and specialty hospitals is expected to boost HCA’s operational performance. In addition, improving Medicare rates and increasing relationships with insurance exchanges will also improve revenues. The increased focus on outpatient clinics and the services provided will also improve profitability.

As a result of high operating performance, despite high debt levels, HCA Holdings stock is expected to perform better than most of its industry peers.

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