Shares of HCA Holdings, Inc. (HCA) jumped 2.7% to $71.25 over the last two trading sessions after the company’s ratings were upgraded by Moody’s Investors Service, the credit rating wing of Moody’s Corporation (MCO). Earlier, HCA Holdings had a Corporate Family Rating (CFR) of “B1” and a Probability of Default Rating of “B1-PD”, which were raised this time to “Ba3” and “Ba3-PD” respectively. Additionally, ratings on the company’s existing debt instruments were revised upward. However, the outlook on these ratings was downgraded to stable from positive.
The CFR rating was upgraded based on Moody’s expectation that HCA Holdings will undertake financial policies to return more value to shareholders and at the same time check the financial leverage levels. Moreover, the rating agency is of the opinion that HCA Holdings will likely improve its profit margins and cash flow in the short run. This will expectedly stem from a decline in bad debt expense and improved cash collection, both of which should result from the benefits of the Affordable Care Act. The stable outlook came on the back of this expectation of Moody’s.
The ratings could be upgraded if the company maintains its earnings growth momentum or repays debt to achieve a debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio below 4x. The ratings agency also stated that it would review the financial profile of HCA Holdings prior to a ratings upgrade.
Conversely, the ratings could be downgraded if HCA Holdings witnesses deterioration in operating trends or if the company incurs additional debt that would take its debt to EBITDA ratio above 5x.
Rating upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. We believe that HCA Holdings’ present score with the credit rating agency will help it write more business going forward.
HCA Holdings currently carries a Zacks Rank #2 (Buy). Other stocks in the hospital industry that look attractive at current levels include Universal Health Services Inc. (UHS) and Tenet Healthcare Corp. (THC). While Universal Health sports a Zacks Rank #1 (Strong Buy), Tenet Healthcare has the same Zacks Rank as HCA Holdings.
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