Essay Preview: HcaReport this essayHospital Corporation of America (HCA)Staff AnalysisStatement of ProblemHCA, after following a conservative financial policy since its establishment, has entered the new decade preparing to make some changes in order to realign their financial strategy and capital structure. Since establishment, HCA has often been used as a measure for the entire proprietary hospital industry. Is it now time for the market to realign their expectations for the industry as a whole? HCA has target goals which need to be met in order to accomplish milestones in the future. The problem arises as to which area holds priority to the company. HCA must decide how the key components of their financial strategy and policy should my approached in order to meet their future goals.
BackgroundHCA has set target goals in several areas and it is important to identify which goals hold priority: Debt Ratio, Growth Rate, ROE, and Bond Rating.Debt Ratio:Currently, HCA is approaching an all time high debt ratio of 70%, well above their established target ratio of 60%. The increase in debt ratio has attracted the attention of rating agencies who have clearly stated that in order for HCA to maintain their A bond rating HCA must return to their 60-40 capital structure. Now the question arises as to whether the A rating should be sought or should HCA move to a less conservative position. Some investors believe that a more aggressive use of leverage would present greater opportunities in the future. Others feel that with changes in Medicare/Medicaid reimbursement structure on the horizon, HCA should remain conservative. In order to decrease the debt ratio, HCA would have to 1) decrease the growth rate (inadvertently decreasing ROE)
2) increase funding of HCA (which would require HCA to make the change in a more conservative direction), and 3) increase profitability of the company (which could not sustain a 1/3 year plan despite changes to policy).The question arises as to whether the A rating or any of the other options should be used (if possible). The risk of high debt ratios that have led to HCA’s negative gearing is considerable for a long time. However, the current market conditions and the fact that the average retirement age, at 62 for the aged and 58 for the young have increased substantially over the last 10 years suggests that a return to a 60-40 financial structure is now in the cards. This may not be an ideal situation, having to meet this target by raising HCA from 0-10% (as the recent low of 0.8% over the last few years).But as for its current A rating and B rating, most of the market has an A rating on the market with a B rating that is set to raise the capital needed. With HCA’s current $14-billion valuation, we can safely conclude that it would have much higher potential.We can also conclude that we do not have a risk of higher leverage at the present time. What determines a HCA return from 2018–2029 would not be the risk of high leverage. However, current market conditions may have prevented the sale.We need not go into further detail.In conclusion, our analysis shows that HCA still has the assets to meet its current long term sustainability goal and that it would have much lower leverage than anticipated with the current portfolio. Our main points should be:• High leverage in the current market.• High leverage in the current market.• Low leverage in the current market.• A risk of high leverage in the future.• A key challenge we address in any A rating is the potential exposure of HCA to a significant deterioration in equity-market performance. We will present our model as follows. Our model is based on the assumption that the market is poised to recover fairly from a potential decline in B and R (as shown in Figure 2). The stock may grow to a market price to under $35 by the end of the year and gradually decline to its historical level. A large part of this decline will come either from the market’s deteriorating equity performance, or by the potential loss from more significant market moves.With respect to the future performance of HCA, our model has a number of attributes which we expect may impact the future performance of other indices. First, our model incorporates all of HCA’s current A assets and their risk associated with the asset class. There is a strong bias associated with having a strong A level asset and risk associated for a class of stocks. Second, our model incorporates a number of index factors that are more correlated with a stock’s performance. We cannot predict the extent to which the index factors associated with the stock may go into overperformance or would be subject to more fundamental risk. Third, our model incorporates information about the equity market, other asset classes, and the extent of overperformance/loss. To be confident that our model and other data sources support a robustly priced A Level asset class and provide accurate and precise estimates of stock returns, we seek to incorporate the performance of HCA into the current or future levels of this class of stocks. To that end, we estimate that approximately 1.5% of the total market’s B+ and M grade (A-grade) assets are subject to change and that the market may reach a $30-40 level in 2029 (the last time HCA’s A and B rating was actively quoted), which is the level expected at which the stock will experience a significant correction in equity and