Amid ongoing concerns of an impending recession, HCA Healthcare Inc. (HCA, Financial) looks like a potentially compelling opportunity. As a prominent operator of hospital chains in the U.S., the company should maintain consistent returns regardless of market conditions since medical care cannot always be deferred.
Therefore, HCA's prospects may remain favorable even during a recession, making it a potentially attractive investment.
So far this year, however, the stock has underperformed the S&P 500 as rising wages have pressured the company's financial results. With the labor market continuing to be tight, investors, understandably, are on the fence.
There are some factors working in its favor, however.
An aging population
As a leading provider of health care services, HCA Healthcare is well positioned to take advantage of the aging population. The U.S. has been experiencing a demographic shift, with a growing proportion comprised of individuals aged 65 and over. This group tends to require more health care services than younger individuals due to the higher incidence of chronic conditions and age-related ailments. As a result, health care spending is expected to rise in the coming years.
Moreover, HCA has been proactively investing in new facilities and technologies to cater to the specific needs of this population. For example, the company has been expanding its geriatric psychiatry services to meet the growing demand for mental health care among the elderly as well as developing specialized programs for treating Alzheimer's and dementia patients.
Further, HCA recently launched two initiatives to improve patient outcomes and boost its bottom line.
The first initiative is the Enhanced Surgical Recovery program, which takes a multidisciplinary approach to surgical recovery. The program has shown remarkable improvements in surgical recovery, resulting in a 44% decrease in opioid usage following surgeries.
While a decrease in the length of hospital stays could mean lower spending, the Enhanced Surgical Recovery program is designed to improve the patient experience, which can lead to a significant percentage of customer retention.
The second initiative is the adoption of Azra AI technology as a vendor for artificial intelligence technologies that can help decrease the time between cancer diagnosis and the first treatment. The technology can reduce the wait time from weeks to days, which can be critical for patients with aggressive forms of cancer.
Both of these initiatives can potentially improve patient outcomes and boost the company's bottom line. By adopting innovative technologies and a patient-centered approach, HCA Healthcare can establish a competitive advantage in the health care industry and attract more patients in the long run. Further, these initiatives demonstrate the company's commitment to meeting the evolving health care needs of the aging population and positioning itself as a leading provider of health care services.
Labor costs are likely to go down this year
HCA Healthcare has been facing significant challenges due to the rising labor costs in recent quarters. During the last fiscal year, salaries and benefits rose 3.33% to $27.68 billion, representing 46% of sales.
The company has been struggling to keep its labor costs in check as inflation has been driving up the cost of everything, including wages, benefits and other employee-related expenses. In addition, the labor shortage for hospital staff is crippling.
Labor costs are a significant portion of HCA Healthcare's expenses, and any increase in these costs can significantly impact the company's bottom line. This is because, unlike other businesses, hospitals cannot change their prices frequently. Based on negotiations with insurers and Medicare, they are locked in for several months or even a year.
The rising labor costs have been putting pressure on HCA Healthcare's profitability, as the company has had to spend more on employee wages and benefits. As a result, the company has been forced to implement cost-cutting measures and other initiatives to improve its financial performance.
Despite a challenging first half of 2022, HCA's second half was decent due to decreased wage pressure and moderating contract labor costs. The company's full-year 2022 revenue totaled $60.23 billion, compared to $58.75 billion in 2021; its net income dropped to $5.64 billion from the previous year's $6.95 billion.
To address the issue of rising labor costs, HCA Healthcare has been focusing on increasing efficiency and productivity across its operations. The company has been investing in technology and other initiatives to streamline its processes and reduce its reliance on labor-intensive tasks.
In addition, HCA Healthcare's labor costs are predicted to decline as the pandemic subsides and inflation gradually improves, though the company has no control over those two factors. Larger macroeconomic trends are at play that are expected to cool the labor market. For instance, the Federal Reserve has taken measures to address inflation and job market issues by increasing interest rates.
Despite this, the job market has remained strong, with the economy adding 568,000 more jobs in the 12 months through March 2022 and nonfarm payrolls increasing by 517,000 in January. The unemployment rate has also decreased to 3.4%, while average hourly earnings have increased by 0.3% and 4.4% year over year.
Using cash effectively
HCA's dividend yield is lower than that of the health care sector, standing at 0.89% (as of writing) compared to the sector's average yield of 1.92%. However, despite the challenging economic environment, the company has demonstrated an ability to increase its dividend yield for the past three years. HCA increased its quarterly dividend from 56 cents per share to 60 cents on Jan. 27.
While HCA has a track record of paying special dividends, share repurchases have been a better source of shareholder returns. Share repurchases help to improve the company's return on assets, provide tax benefits and ultimately lead to a higher share price - especially if the repurchased shares are retired.
In the fourth quarter of 2022, HCA repurchased $1.51 billion worth of stock, leaving $1.586 billion remaining under its current share repurchase program as of Dec. 31. For the entire fiscal year, the company's board of directors authorized an additional buyback program worth $3 billion of the company's outstanding common stock without an expiration date.
Since December 2013, HCA has bought back more than 45% of its outstanding share capital, significantly contributing to its long-term earnings per share growth. Despite margin pressures, the company's financial results continue to remain strong.
These measures, along with the company's increasing dividend yield, bode well for HCA's shareholders and its financial performance in the future.
Takeaway
HCA Healthcare appears to be a compelling option for investors looking for exposure to a company that will benefit from a decelerating labor market and has limited cyclical risk while actively repurchasing its stock.
Although the industry may continue to experience challenges in short to medium term, value investors may find HCA Healthcare's current share price attractive. Despite the rally over the last six months, shares of the company appear undervalued and recent declines could be viewed as a potential opportunity.
