HCA Earnings: Improving Medical Utilization and Labor Trends Boost Outlook

Narrow-moat HCA Healthcare’s HCA better-than-anticipated first-quarter results benefited from improving medical utilization trends and easing labor cost pressures. These factors contributed to a meaningful increase in management’s 2023 outlook. Considering these trends and cash flows generated since our last valuation change, we are increasing our fair value estimate by 9% to $260 per share.

In the quarter, improved medical utilization helped revenue grow faster than expected, and the bottom line grew even faster on easing labor pressures and share repurchases. Revenue grew 4% year over year on a 7% increase in equivalent admissions and a 2% decline in revenue per equivalent admission, as lower-acuity cases increased in the admission mix compared with the COVID-19-heavy (and higher-acuity) cases last year. Adjusted EBITDA grew 8% as labor cost pressures eased, including about a 20% decline in contract labor costs that helped salaries and benefits only increase 2% over last year, when labor pressures were especially high. Including share repurchases, adjusted EPS grew 20% to $4.93, well above FactSet consensus of $3.91.

These impressive trends are setting HCA up for a stronger year than anticipated, and management increased its 2023 outlook materially for revenue, EBITDA, and EPS primarily just for the first quarter’s outperformance. The new EPS outlook range of $17.25-$18.55 represents about a 6% increase at the midpoint, up from a roughly flat outlook previously. Considering the strong first-quarter results, we have increased our assumptions for 2023 toward the strong end of management’s new profit goals, which may even prove a bit cautious, should first-quarter trends continue. We are encouraged that medical utilization and labor pressures are improving and believe further reimbursement benefits are possible as multiyear contracts with third-party payers are renegotiated to better reflect recent inflationary pressures.