HCA Healthcare shares fell by -6.8% during the day's afternoon session, and are now trading at a price of $320.01. Is it time to buy the dip? To better answer that question, it's essential to check if the market is valuing the company's shares fairly in terms of its earnings and equity levels.
HCA Healthcare Is Undervalued at Today's Prices:
HCA Healthcare, Inc., through its subsidiaries, owns and operates hospitals and related healthcare entities in the United States. The company belongs to the Health Care sector, which has an average price to earnings (P/E) ratio of 27.53. In contrast, HCA Healthcare has a trailing 12 month P/E ratio of 16.0 based on its earnings per share of $20.05.
There is an important limit on the usefulness of P/E ratios. Since the P/E ratio is the share price divided by earnings per share, the ratio is determined partially by market sentiment on the stock. Sometimes a negative sentiment translates to a lower market price and therefore a lower P/E ratio -- and there might be good reasons for this negative sentiment.
One of the main reasons not to blindly invest in a company with a low P/E ratio is that it might have low growth expectations. Low growth correlates with low stock performance, so it's useful to factor growth into the valuation process. One of the easiest ways to do this is to divide the company's P/E ratio by its expected growth rate, which results in the price to earnings growth, or PEG ratio.
HCA Healthcare's PEG ratio is 1.66, which shows that the stock is overvalued in terms of its estimated growth. For reference, a PEG ratio near or below 1 is a potential signal that a company is undervalued.
Exceptional Profitability Overshadowed by Excessive Leverage:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|---|
| Revenue (M) | $46,677 | $51,336 | $51,533 | $58,752 | $60,233 | $64,968 |
| Operating Margins | 11% | 10% | 11% | 17% | 14% | 12% |
| Net Margins | 8% | 7% | 7% | 12% | 9% | 8% |
| Net Income (M) | $3,787 | $3,505 | $3,754 | $6,956 | $5,643 | $5,242 |
| Net Interest Expense (M) | $1,755 | $1,824 | $1,584 | $1,566 | $1,741 | $1,938 |
| Depreciation & Amort. (M) | $2,278 | $2,596 | $2,721 | $2,853 | $2,969 | $3,077 |
| Diluted Shares (M) | 355 | 348 | 344 | 329 | 295 | 276 |
| Earnings Per Share | $10.66 | $10.07 | $10.93 | $21.16 | $19.15 | $18.97 |
| EPS Growth | n/a | -5.53% | 8.54% | 93.6% | -9.5% | -0.94% |
| Avg. Price | $108.92 | $126.27 | $122.49 | $213.78 | $227.62 | $320.88 |
| P/E Ratio | 9.99 | 12.3 | 11.04 | 9.93 | 11.71 | 16.67 |
| Free Cash Flow (M) | $3,188 | $3,444 | $6,397 | $5,382 | $4,127 | $4,687 |
| CAPEX (M) | $3,573 | $4,158 | $2,835 | $3,577 | $4,395 | $4,744 |
| EV / EBITDA | 9.25 | 9.74 | 8.67 | 8.34 | 9.2 | 11.83 |
| Total Debt (M) | $32,821 | $33,722 | $31,004 | $34,579 | $38,084 | $39,593 |
| Net Debt / EBITDA | 4.25 | 4.22 | 3.58 | 2.61 | 3.22 | 3.59 |
| Current Ratio | 1.35 | 1.44 | 1.42 | 1.41 | 1.38 | 1.18 |
HCA Healthcare has growing revenues and increasing reinvestment in the business and strong operating margins with a stable trend. Additionally, the company's financial statements display generally positive cash flows and a strong EPS growth trend. However, the firm has a highly leveraged balance sheet. Finally, we note that HCA Healthcare has just enough current assets to cover current liabilities, as shown by its current ratio of 1.18.
