Undervalued Healthcare Stock Trading At A Forward P/E Of 8.5 – ValueWalk
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Undervalued Healthcare Stock Trading At A Forward P/E Of 8.5
Below is a snippet from one of our interviews:
[REDACTED] is the largest hospital business in the United States, operating 177 hospitals, 46,000 beds, 69 freestanding surgery centres and a range of other medical facilities. The company trades at a low multiple of 7.0x EV/EBITDA. This is largely due to market noise in the United States around the repeal of the Affordable Care Act, better known as ‘Obamacare’. We believe the worst case scenario of a full-repeal is more than priced in..
We are buying the company at a greater than 10% steady state free cash flow yield and we believe cash earnings per share can grow at double digit rates per year driven by an aggressive capital allocation policy focused on share buybacks. Since the IPO in 2011, [REDACTED] has generated $11.2bn free cash flow. Over the same period [REDACTED] has repurchased $9.9bn of shares (reducing share count by 21%), paid $3.2bn in special dividends and made $4.4bn worth of acquisitions. At the same time the company has reduced debt/EBITDA from 4.7x to 3.8x today.
We also see some interesting tax optionality. [REDACTED] is a material taxpayer at a roughly 35% tax rate. Should the Republicans proceed with the proposed tax reform, [REDACTED] would save a material absolute dollar amount of tax per year which, when spread over a declining share count, could boost earnings per share by 30% in 3-years even assuming no underlying growth in earnings. This would reduce the effective price we are paying from about 10.9x P/E currently to about 8.5x P/E.
So, while in many industries, tax savings may ultimately end up in the hands of customers as companies compete the tax savings away, [REDACTED] is in the almost unique situation of being one of the few companies that would receive a material tax benefit and be able to retain most of it as very few others in its industry would receive the same tax saving. It does not take many guesses to work out what this management team would do should they find themselves with an extra $500-600m in free cash flow every year and their shares trading at an effective price of 8.5 P/E – they will be buying back even more shares.
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