HCA Healthcare (NYSE: HCA) Stock is Already Overvalued

For-profit hospital operator HCA Healthcare (NYSE: HCA) shares have been riding the coattails of the rally in the healthcare sector and the S&P 500 index (NYSEARCA: SPY) . Shares have nearly doubled off its March 2020 pandemic lows near the $58.37 Fibonacci (fib) level. However, a further look into the operations of HCA reveals the exuberant rebound in share prices may be overdone. Investors may want to consider unwinding positions during the market melt-up before the disconnect with reality becomes too transparent.

Q1 2020 Earnings Results

HCA reported its Q1 2020 earnings report for the quarter ending in March 2020. Revenues were $12.86 billion versus $13.12 billion consensus analyst estimates, 2.2% year-over-year (YoY) growth but missed estimates. Earnings-per-share (EPS) was $2.33 versus $2.77 consensus estimates, a (-$0.44) miss. The Company temporarily suspended its dividend and withdrew its guidance forecasts for 2020 due to the uncertainty from COVID-19. The Company has treated near 5,500 COVID-19 cases at the time of the April 21^st conference call. Approximately 11,000 corporate workers took 10% to 30% salaries for April and May as 90% of support staff worked from home.

COVID-19 Impacts

The COVID-19 pandemic blindsided the U.S. equity markets on Feb. 19^th as the SPY commenced a (-34%) plunge from its all-time highs to slide into a bear market in record time. Hospital stocks initially viewed as a beneficiary seeing spikes in admissions were soon overwhelmed as supply shock entered the picture with ballooning overhead expenses. The added expenses stemming from COVID-19 included bolstering ICU capacity, purchasing protective gear for staff, skyrocketing safety costs while the most profitable revenues coming from non-emergency procedures were cut off. As COVID-19 cases peaked and regions lift isolation mandates, hospitals overshot to handle larger capacity only to see it shrink, resulting in staff furloughs and layoffs. Billings for COVID-19 testing and treatment may boost top-line revenues in the upcoming Q2 2019, but net income is questionable due to the equally unexpected spike in overhead expenses and cancellation of elective procedures.

Which Narrative Applies?

Like stockpiling stocks, medical providers that saw a surge in top line will not be able to sustain that pace. The markets have been flip-flopping on which narrative pandemic benefactor or restart play to apply to medical providers. The one constant is the conventional hospital facility model has largely been unprofitable and 49% of hospitals in California were either unprofitable or break even before the pandemic. Most will be left financially worse for wear as the pandemic subsides.

For-Profit Medical Paradox

The notion of a for-profit hospital system underscores the ethical ramifications embedded in the notion of profiting from the misery of patients in need of care. The profit motive is accelerated when the organization is a publicly-traded company relegated to meeting Wall Street expectations of accelerating revenues and profits on a quarter-by-quarter basis. Incentivized by stock-based compensation and ability to raise more capital when shares accelerate further enabling currency to continue to consolidate through acquisition purposely overpaying to gain Goodwill assets that bolsters valuations enabling more acquisitions, rinse and repeat. This is the classic “roll-up” strategy that built up stocks like Valeant Pharmaceuticals which climbed to $300s only to collapse under $10 as momentum vaporized as revenue scandals came to light.

Accrual-Basis Versus Cash-Basis Reporting of Revenues

When it comes to medical providers and facilities, there is a big difference in what is considered revenues between public and private companies. Private medical practices traditionally book revenues on a cash-basis, which means posting the actual payments received for medical services as revenues. As most know, there are multiple levels of “pricing” for medical services depending on your health insurance or lack of. There is a standard price, then a network price and out-of-network price. For example, an outpatient consultation with a general practitioner may be billed at $300. If you don’t have health insurance, that’s your cost. However, if the doctor participates in your insurance network, they may receive $90 and a $10 co-pay. If out-of-network, they may negotiate to receive $50 from the insurer and a $50 out-of-pocket expense from you. In general, for the $300 billed, the provider would receive $100 in actual payment from payors, which is considered revenue under cash-basis accounting.

Financial Engineering Distorts Valuations

However, publicly traded companies are required to report under accrual-basis accounting which means the $300 billed amount is posted as revenues first then adjusted after collecting payment. Since the bulk of charges are written-off, most hospital facilities operate under the non-profit status. This is just one of the questionable elements of determining the true valuation of publicly traded medical providers, which are traditionally heavily levered. The migration away from hospitals to urgent care outpatient facilities has been chipping away at industry admissions which has also migrated towards bolstering elective procedures.

Price Trajectory Levels

Using the rifle charts on the wider weekly and daily time frames to lay out the playing field is suitable for swing traders and investors. HCA bottomed out near the $58.37 Fibonacci (fib) level low on March 18, 2020. The daily market structure low (MSL) buy triggered above $88.45. The weekly bullish mini pup grinded up HCA to a triple top at the $114.50 to $116 price range firming rejecting breakout attempts. The last breakout attempt was deflected so hard that it crossed down the daily stochastic at the 80-band threatening the weekly stochastic cross down which can trigger a bearish inverse pup. The biggest danger is the monthly downtrend accelerated by a mini inverse pup from the monthly 5-pd MA rejection back under $114.49. In a nutshell, HCA is forming a potential perfect storm breakdown triggered by the daily stochastic cross down and weekly close under the 5-period MA at $105. In this bearish scenario, HCA has downside trajectories to the $98.41 fib, $94.98 fib, $88.45 daily MSL trigger and $75.25 fib.    Investors may consider unwinding positions ahead of or implementing trail stops below the trajectory levels if the bearish perfect storm breakdown triggers. Nimble traders can play the reactions off the key fibs.