HCA Healthcare Earnings: Velasco Venture Pressures Profits Despite Strong Underlying Trends

Narrow-moat HCA HCA turned in a weaker-than-anticipated third quarter, which was constrained by underperformance at Velasco, its hospital-based physician venture that may create a moderate profit headwind, going forward. However, underlying trends in its provider services were strong, and our 2023 expectations remain within management’s updated outlook. At first glance, we do not see a reason to materially change our $260 fair value estimate, which appears mildly above where shares recently traded.

In the quarter, increasing medical utilization continued, although the firm’s profits were negatively affected by the pressures felt at Velasco. HCA’s revenue rose 8% year over year to $16.2 billion (above FactSet consensus of $15.8 billion) on a roughly 5% increase in equivalent admissions and 4% increase in revenue per equivalent admission, as the return of higher-acuity surgeries helped the firm’s core operations. Adjusted EBITDA declined 1% year over year to $2.9 billion, though, as underperformance in Velasco outweighed other factors like easing labor cost concerns. Management highlighted that it needs to enhance the revenue generated by the Velasco services, and until then, Velasco may create a roughly $200 million annual headwind on HCA’s operating profits.

Considering these factors, management merely narrowed its 2023 guidance ranges for revenue, EBITDA, and EPS. Our assumptions for 2023 remain within management’s new adjusted EPS guidance range of $17.80 to $18.50, which is only slightly different than the company’s previous outlook for $17.70-$18.90. While the firm’s core operations appear solid, investors may be concerned that Velasco will pressure the firm’s 2024 guidance, which management intends to share at its investor day in early November. Even if we mildly cut into the annual run rate of HCA’s profits by the $200 million Velasco profit headwind, though, our HCA fair value estimate does not change. HCA aims to mitigate those pressures eventually, as well.