HCA Healthcare's Intrinsic Value: 87% Above Its Share Price?

In the ever-evolving landscape of healthcare, HCA Healthcare, Inc. (NYSE:HCA) stands as a titan, with its stock price currently hovering around US$332. However, a closer examination using a two-stage Discounted Cash Flow (DCF) model reveals a stark discrepancy: the company's intrinsic value is estimated to be US$619, suggesting an 87% undervaluation. This analysis delves into the factors driving this valuation gap and explores how HCA Healthcare's recent financial performance supports or contradicts these estimates.

The DCF Model: A Deep Dive

The two-stage DCF model projects future cash flows and discounts them to their present value, providing a comprehensive view of a company's intrinsic worth. For HCA Healthcare, this model suggests a fair value of US$619, significantly higher than the current share price. The model's assumptions include a higher growth period followed by a steady growth phase, with a present value of 10-year cash flow (PVCF) estimated at US$46 billion.

Financial Performance: A Mixed Bag

HCA Healthcare's recent financial reports paint a picture of robust growth and operational efficiency. For the fourth quarter of 2024, the company reported revenues of $18.285 billion, a 5.7% year-over-year increase. Net income attributable to HCA Healthcare, Inc. was $1.438 billion, or $5.63 per diluted share, and Adjusted EBITDA totaled $3.712 billion. These figures align with the DCF model's assumptions of growing cash flows and profitability.

However, the company's share repurchase program, which saw the repurchase of 4.739 million shares at a cost of $1.700 billion during the fourth quarter of 2024, introduces a layer of complexity. While this program can support the share price, it also indicates that the company is returning capital to shareholders rather than reinvesting it for growth. This could impact future cash flows and growth prospects, potentially affecting the accuracy of the DCF model's valuation.

Natural Disasters and Facility Sales: Unforeseen Challenges

The fourth quarter of 2024 results include an estimated $0.60 per diluted share unfavorable impact from Hurricanes Helene and Milton. Such external factors can introduce volatility into the company's financial performance, which may not be fully captured in the DCF model's assumptions. Additionally, the company reported losses on sales of facilities of $195 million, or $0.59 per diluted share, indicating divestment of certain assets. These factors highlight potential risks and uncertainties that could impact the accuracy of the valuation.

Analyst Price Target: A Cautious Outlook

The analyst price target for HCA Healthcare is US$375, which is 39% less than the estimated fair value of US$619. This discrepancy indicates that analysts may be underestimating the company's future growth potential or overestimating the risks associated with its operations. As new information becomes available or changes in the company's performance occur, analysts may adjust their price targets, potentially reducing the discrepancy between the intrinsic value and current share price.

Operational Improvements: A Testament to Efficiency

HCA Healthcare has made significant operational improvements, as evidenced by the increase in same facility admissions (3.0%) and same facility equivalent admissions (3.1%) in the fourth quarter of 2024. These improvements indicate that the company is effectively managing its operations and providing value to its patients, employees, and shareholders. This operational efficiency supports the DCF model's assumptions of growing cash flows and profitability.

Conclusion: A Valuation Puzzle

HCA Healthcare's financial performance shows strong revenue growth, profitability, and cash generation, supporting the DCF model's valuation estimates to some extent. However, factors such as share repurchases, natural disasters, and facility sales introduce uncertainties that may not be fully accounted for in the model. As the company continues to navigate these challenges and opportunities, investors will be watching closely to see if the intrinsic value of US$619 is realized, or if the current share price of US$332 remains the more accurate reflection of HCA Healthcare's worth.