Is HCA Healthcare a buy?

Health HCA (NYSE:HCA) is a leading owner and operator of medical facilities, including more than 180 hospitals and has approximately 2,200 ambulatory care sites. The stock offers investors a great way to gain exposure to the healthcare sector. And now that hospitals aren’t overwhelmed with COVID-19 cases and are resuming normal operations, this could be a good buy.

However, year-to-date, HCA shares are still down 22% (worse than the S&P500down 17%) as rising labor costs in previous quarters eroded the company’s profitability and made investors bearish on stocks. Is this beaten healthcare stock really a bargain for investors, or are there issues that should keep you away from it?

Growth has been relatively stable

One of the downsides of HCA’s business is that there is usually not much growth due to the nature of its business; the company depends on patient volumes and how much it can collect from them and third-party payers. One of the best ways for the company to grow is to expand its portfolio and pursue acquisitions. Over the past five years, HCA has averaged a decent year-over-year growth rate of 7.5%.

HCA (Quarterly YoY Growth) Revenue Data by YCharts

Apart from the impact of the pandemic, the company’s finances have largely increased at a steady pace. For long-term investors, this kind of predictability can be extremely valuable. In the last quarter, investors may notice a drop in the growth rate to less than 2.7%. HCA noted that for the period ended June 30, admissions to facilities (on a like-for-like basis) declined 1.2% and it recorded similar declines in surgeries.

However, the growth rate can and will fluctuate, so this is not necessarily a cause for concern. Additionally, HCA also sold some hospitals last year and had fewer locations compared to the prior year period (but on the other hand, it had more stand-alone surgery centers).

Cash flow and operating margin remain solid

Besides revenue growth, two numbers investors should always consider when looking at stocks are free cash flow and operating margin. The first tells you how well the company is generating cash and whether it can sustain its level of growth without having to dilute shareholders. The latter, on the other hand, can be a more useful measure than simple profit margin, because operating profits come before non-operating items such as gains or losses, which can skew a company’s profits. And on both fronts, HCA seems to be doing well:

HCA Free Cash Flow Statement (Quarterly)

HCA Free Cash Flow Data (Quarterly) by YCharts

Like its revenue growth, the company’s free cash flow has been fairly consistent. And the operating margin appears to be at the upper end of what it was before the pandemic began. One of the difficult trends the company faced was that when COVID levels were high, HCA hospitals spent more money on temporary nurses due to understaffing. But with this trend fading now, HCA could post even better earnings numbers in the coming quarters.

Is the stock a cheap buy?

Considering its five-year average, HCA stock definitely looks cheap, trading at less than 10 times its trailing earnings:

Table of HCA PE ratios

HCA PE Ratio Data by YCharts

The SPDR Fund for Healthcare averages a price/earnings multiple of 20, which makes HCA even better in comparison.

Overall, with a solid business generating predictable growth and enjoying strong operating margins and free cash flow, HCA looks like a solid investment today, especially at its modest valuation. For long-term investors, buying and holding stocks could be a great decision.

An added incentive is that HCA pays a yield of 1.1%. Although this is less than the S&P 500 average of 1.7%, it can boost your returns and ensure you receive recurring income when you hang on to the stock.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends HCA Healthcare. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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