Those investors who got in on the March IPO of HCA Holdings (NYSE:HCA) at $30 per share were probably patting themselves on the back in early June, when the stock traded near $35. Heck, nothing wrong with a 16% return on your money in just a few months.
Today, those who grabbed the IPO might be feeling a little sick to their stomachs. Even after recovering from a low of about $18 last week, HCA is trading nearly 30% below its initial offering price. It appears the Nashville, Tenn.-based hospital operator was hit by a double whammy — the market shakeup of the past few weeks and disappointing second-quarter results.
Sales for HCA were up slightly from the second quarter a year earlier, but earnings per share plummeted more than 35% over the same period. The main culprit was a drop in expensive surgeries. They declined even though admissions were up for the quarter. Seems people were checking into HCA facilities for simpler — and less costly — procedures.
In view of its disappointing second quarter, HCA cut its guidance for 2011, adjusting its goal of mid-single-digit growth in adjusted EBITDA for the full year to 3% to 5%.
With the economy expected to remain on life support for the near future, is the reduction in growth prospects a harbinger of things to come and a reason to avoid HCA and other hospital providers? Maybe. After all, when money gets tight and unemployment rises, people tend to postpone surgery. Also hanging over the head of HCA and its colleagues are expected cuts in Medicare spending. Here, HCA is particularly vulnerable because Medicare patients make up about 42% of its customers, the highest rate among publicly traded acute-care hospitals, according to data compiled by Bloomberg Industries.
Facing what the industry calls reduced intensity of services, perhaps the only way for HCA to boost earnings is by ratcheting down its expenses. That’s precisely the tack the company plans to take, according to Chairman and CEO Richard Bracken. In a conference call with analysts, he emphasized that the company is “looking to continue to manage expenses appropriately.”
But with shrinking revenues, just how much expense can be carved from HCA operations to make the stock attractive to investors? Probably not enough. And even if costs are cut, just how much upside does the stock offer?
Still, the sector has supporters out there. Some industry observers think the industry has been the victim of investor panic and see opportunity in HCA, as well as others whose stocks have been pummeled, including AmeriGROUP (NYSE:AGP), Kindred Healthcare (NYSE:KND), Skilled Healthcare Group (NYSE:SKH) and Sun Healthcare (NASDAQ:SUNH). They note that all of these companies have enjoyed strong revenue growth and have solid balance sheets.
Perhaps the safest play for the investor who thinks provider shares have been beaten down past a reasonable level is the iShares Dow Jones U.S. Healthcare Providers Index Fund (NYSE:IHF), although HCA isn’t even listed among the top holdings.
Barry Cohen does not own a position in any of the stocks named.
