EFTA01452968.pdf

Deutsche Bank Markets Research Rating (kimi)0117 4 February 2014 Buy HCA Holdings, Inc. Results North America United States Price at 3 Feb 2013105131 48.46 Health Care HCA N HCA US NYS Price Tartlet 58.00 Health Care Facilities 52-week ranee 51.41 - 35.21 and Services Q4 surgery/mix recovering; 2014 / Oarreu Letirteli Research Analyst ACA outlook conservative (+11 212 250-2629 [email protected] Reiterate Buy. F ICA's it:sure: demomtrate best in breed (14 operating metrics were not given at time of early Jan. +ve pre-anncmt. Nniwklvietn Actual results highlight a recovery in surgical trends, which boosted Research Associate pricing/mix and helped drive solid C14 EBITDA growth (+6.7% YoY) despite (+11 212 260.3070 weaker inpt medical trends and a tough vol comp. HCA provided initial ACA [email protected] guidance, but mgmt may revisit assumptions on key ACA variables mid-year given how fluid the roll-out is. For 2014. ACA initially guided -$100M (+1.5%) EBITDA benefit underpinned by 7%-9% reduction in uninsured and slight offset Darla pantie. CFA by pricing/vol impact for exchange mix. Given strong organic growth trends in Research Associate recent Qs, we believe 2014 EBITDA guidance should prove conservative. (+11 212 250-6587 Q4 CC.: tal.oawaytt fret:O1(S uview rn Itcrely of note) [email protected] 11) Volume/prbIng metrics: surgery the bigger story. Weak SS inpt admits (- 1.8%) reflect tough comp, lower flu trends and -50 bps from 2-midnight rule. IPTieoiptice Importantly. HCA does not see 2-midnight rule having material financial impact. The bigger vol story in O4 (and last 3 Qs) is surgeries; Q4 surg vol (+1.4%) and strength in higher-acuity areas (cardio, ortho, neuro) helped drive pricing (RPAA) +4.8% YoY. The ratio of inpt surg / inpt admit rose to 30% (from -29% avg past 2 yrs) and ratio is 200-300 bps below peak. A sustained rebound in surgical mix could be an upside risk to guidance. '(2) 2014 guidance assumes 1%-4% EBITDA growth. Underlying assumptions (ex. ACA) include 1-2% adj. admit (vol) growth. 2-3% RPAA (pricing) growth mcam 'app. ;roc and flat margins. Given 2H'13 RPAA growth (+4%) and recovery in surg. RPAA SIP 06)111,EX 0..tbasten seems conservative. Guidance assumes adj. vols improve vs. 2013 flat. The Performance (%I 1n1 3m 12m key headwinds built-into guidance: $120M lower YoY HITECH and $55M higher YoY stock comp which impact growth by 300 bps vs. DBe orig est 200 Absolute .0.6 2.4 26.8 bps. We believe guidance implies 2%-5% base growth ex headwinds and ACA. S&P 600 INDEX -4.9 -1.1 15.1 '(3) ACA commentary: a reasonable starting point. HCA framed ACA impact as awn Cana Sat a L-T positive, but key variables remain very fluid this year including: (I) enrollment for exchange and Medicaid; (2) net new lives; (3) networks and plan selection of exchange products. HCA assumes 7-9% reduction of uninsured (reasonable) but offset somewhat due to leakage and pricing (conservative). Updated estimates: modest adjustment:- to reflect HI TECH, slower /AGA ramp 2014 EBITDA / EPS are $7.056 / $3.92 from $7.1456 / $4.17. We come out above guidance (56.606-$6.856 EBITDA / S3.45-$3.75 EPS ) due to underlying growth and ACA. Our model now reflects higher S/O, slightly lower HITECH benefit, slightly lower ACA ramp but slightly better rate/mix. Valuation and risks: PT remains at $58 or 7.5x 2015 EV/EBITDA Our target multiple is in-line with group's L-T average of 6.5x-7.5x. Key risks: implementation of PPACA, payer mix changes, Medicare/Medicaid cuts. no/I + co- Year End Dec 31 2013A 2014E 2015E N EPS (USD) 3.42 3.92 4.77 EWEN TDA 7.2 7.1 6.2 Adiustod EBITDA 6.574 7.048 7.749 Sow< Oa ssay 64nk egvnarn COMPOIN sea SixIWO, h• enpoct of FA$Ifl nqurng the nvon.ong Of mock optee4 Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SONY-0110321 CONFIDENTIAL SDNY_GM_00256505 EFTA01452968