Joseph Chiarelli, healthcare analyst, Chiarelli & Co., Wyckoff, N.J.
We expect a focus on creating cash flow by building the avenues that find and attract paying patient volume and through product-line adjustments. One method we expect is a proportional increase in outpatient services and acquisitionsprobably in conjunction with physicians and other partners. This approach also levers HCAs existing facilities and services as well as computer and payer services. In conjunction with this focus, we expect a realigned corporate organization with greater field responsibilityprobably at the group level. We believe HCA is creating the ability to anticipate local competition and demand.
Second, we expect the sale of assets that cannot meet corporate cash-flow hurdlesmeaning margin expansion is not probable in the near future and/or capital investment will not generate adequate returns.
Our expectations for operating results follow. Revenue: a range of $26.3 billion to $27.8 billion, assuming no major asset sales or acquisitions. The range is wide because of the potential for selective product-line changes. Earnings before interest, taxes, depreciation and amortization: In the range of $4.3 billion to $4.5 billion. It could be higher if they are aggressive in asset management and leverage. Capital expenditures: around $1.8 billion for existing and targeted new facilities. This does not include acquisitions.
Uncompensated care: The likely probability is that these costs increase before they decrease during the second half of the year. Id like to see HCA take an innovative approach to lead the industrymaybe the creation of an internal group focused on how to provide necessary care with minimal incremental cost. Miles Highsmith, director of high yield research, Wachovia Capital Markets, Charlotte, N.C.
Looking into 2007, we expect management to continue to focus on core operations, with continued attention on upfront collections from uninsured patients and other mechanisms to mitigate uncompensated-care pressure. We believe Medicare pricing should increase again by low- to mid-single digits, and, given HCAs solid market positions, we expect continued mid-to-high single-digit commercial rate increases for 2007.
We believe HCA will make capital expenditures of around 6% of revenue and ... that a higher level of capital spending is necessary in todays competitive environment and that HCA continues to be proactive on this front (i.e., particular attention to the outpatient side and inpatient expansion to maintain existing revenue and add incremental volume). If HCA hits our estimate, it will generate earnings before interest, taxes, depreciation and amortization of $4.2 billion in 2007 (this is net of minority interest).
We believe there is a fair amount of margin variability in HCAs portfolio of hospitals. As such, we believe HCA has the ability to sell underperformers at attractive (past 12-month) multiples to a buyer that believes it can improve operations. That said, we believe the company will be diligent in such a process, and we do not envision meaningful asset sales over the immediate term.
We believe longer term that (HCA investor) returns will likely come more from multiple expansion than from equity creation through deleveraging and/or earnings growth. We expect the markets to reward healthcare providers (with higher valuations) over the next several years in part from the perception of expected increases in healthcare consumption. We believe an initial public offering (for the sale of a portion of its stake and for liquidity) is always on the (owners) radar but expect them to be patient (i.e., a three- to five-year time frame) and take advantage of an environment where multiples are higher and after a significant holding period has elapsed.