Credit Suisse Initiates Coverage On Health Care Facilities: HCA, Lifepoint At Outperform, Tenet, Universal Health At Neutral

• Shares of HCA Holdings Inc HCA, LifePoint Health Inc LPNT and LifePoint Health Inc LPNT are down YTD, while Universal Health Services UHS shares have gained over the same period.
• Credit Suisse’s Scott Fidel initiated coverage of the Managed Care and Health Care Facilities segments with a Neutral rating.
• After generating superior investment returns during 2013-1H15, the Managed Care and Health Care segments are expected to witness an uncertain trading environment in 2016, Fidel stated.

Analyst Scott Fidel mentioned that fundamentals and politics are expected to create increased uncertainty in the trading environment in 2016, after an extended period of strong investor optimism. The Managed Care and Health Care Facilities sectors generated superior investment returns during the 2013-1H15 timeframe with expansion of multiples.

The period was marked by brightened investor perceptions around the Affordable Care Act [ACA], followed by an unprecedented upcycle of M&A in the health care segment that accelerated in 2015, Fidel mentioned.

The analyst believes that the market view suggesting that the ACA was a key driver of accelerating long-term earnings and fundamentals will be increasingly challenged.

He added, “We believe the key risk to the embrace the ACA thesis that emerged in 2013-2014 relates to the rapidly deteriorating fundamentals in the public exchanges and lack of additional Medicaid expansions entering 2016.”

MCO and hospital stocks have always been highly sensitive to politics, ahead of major elections. The Credit Suisse report noted, “P/E multiples for MCOs and EV/EBITDA multiples for hospitals tend to trade at discounts to their 5 year averages leading into Election Day.”

Another important factor that may drive the performance of these stocks is the regulatory reviews of the mega-cap MCO mergers, along with the continuing challenges being faced by the public exchanges. Fidel recommended selective exposure to the segment.

HCA

Credit Suisse initiated coverage of HCA with an Outperform rating and a price target of $75. The company is a market leader in the acute care hospital space and is well positioned to generate above-average volume growth and market share gains, Fidel said.

He added that the company’s strong position in the large urban markets and continued investment in existing hospital operations remain its strengths.

“Given the company’s historically low leverage profile coupled with its strong free cash flow generation and track record for returning capital to shareholders, we also believe that capital deployment remains a differentiator for HCA,” the report stated.

Fidel expects HCA’s shares to outperform in 2016 if the company continues to post robust organic growth and effectively use its capital.

LifePoint Health

Fidel initiated coverage of LifePoint Health with an Outperform rating and a price target of $79. He believes that the margin ramp from the company’s recently accelerated acquisition strategy is a “significantly underappreciated tailwind.”

“We estimate that the $2 billion in annual revenues LPNT has acquired since 2011 has resulted in a 200-300-bps margin drag over the last few years and is now approaching an inflection point to transition to a margin tailwind,” the analyst wrote.

The company’s robust balance sheet indicates room for additional M&A and share repurchases in the future. LifePoint Health is also expected to benefit from the re-emergence of some of the advantages of its non-urban footprint, Fidel commented.

Tenet Healthcare

The analyst initiated coverage of Tenet Healthcare with a Neutral rating and a price target of $33.

Tenet Healthcare’s relatively high leverage profile remains a concern area especially in the context of a year with increased political uncertainty, a potential increase in interest rates and a more cautious investor sentiment around hospitals, Fidel mentioned.

The company is, however, expected to benefit from its recent portfolio optimization measures and continued strong growth and margin expansion in its business services division, Conifer. Tenet Healthcare’s deal with USPI is expected to result in the creation of an entity that is poised for robust growth through further penetration of hospital relationships, the Credit Suisse report stated.

Universal Health Services

Fidel initiated coverage of Universal Health with a Neutral rating and a price target of $129. He mentioned that the company has a balanced risk-reward profile, and added that there are certain potential tailwinds looming that could benefit the stock in 2016.

These potential tailwinds include the strong behavioral health fundamentals, coupled with increased momentum in Washington D.C. around improving behavioral health issues, Fidel added.