HEALTHCARE SERVICES Healthcare Facilities Market Weight HOSPITALS Updating Models Post Q1, 2019 Setting Up Well for HCA Updating Models Following 1Q18 earnings we are updating estimates and price targets for our hospital coverage. Our estimates for HCA (2019+) and THC increase, while our estimates for CYH / LPNT / UHS are generally unchanged. As discussed below, at this stage we see 2019 setting up particularly well for HCA given the potential for a significant benefit from Medicare DSH and expected margin expansion on recent deals. HCA While Q1 EBITDA was fairly in-line same store EBITDA grew ~8.5% with OK divestitures (150bps, expected) and losses at recently acquired facilities (160bps, unexpected) serving as headwinds to reported results. The acquired facility headwinds should moderate and we est. could add $100m to YoY EBITDA for 2019 and as importantly, HCA could also see a significant benefit from Medicare rates / DSH in 2019 until finalized we have not reflected that benefit in numbers. We est. the potential benefit from DSH at between $150-$250m (2-3%) annually beginning in Q4 18 which along with a likely 1% YoY benefit from M&A ramp above could have HCA within its target EBITDA growth range before any assumption of core growth next year. For now our PT moves to $115 from $110 on our revised core estimates and we maintain our Outperform rating. THC Reported 1Q18 adjusted EBITDA of $665M, well above WR / Consensus of $604M/$603M and $580-$630M guide. Stronger Hospital and Conifer results drove the upside. THC raised full-year adjusted EBITDA guidance by $50M to $2.55-$2.65B to reflect the improved outlook for Conifer margins. New CEO Rittenmeyer has outperformed on the cost cutting side, both in terms of timing and conversion to EBITDA. On our revised ests our PT increases to $30 from $23, but with THC shares up almost 30% last week and 105% YTD we maintain our Peer Perform rating. IPPS / DSH In April CMS released the Medicare FY2019 Hospital Inpatient Prospective Payment Systems (IPPS) proposed rule. Including the benefit of methodology changes to Medicare DSH (details on Page 8), we would expect all-in reimbursement for the industry of +340bps and +300bps for the for-profits based on the proposed rule. DSH impact varies widely be company, with HCA (+52%, +$250M) and UHS (+49%, +$35M) set to see larger increases with LPNT (+9%, $5M), THC (+2%, +$4M) and CYH (+1%, +$2M) below average increases. We estimate HCA s Medicare rate for 2019 could be 5.5%-6.0% (+1.7% for-profit update before DSH, DSH +4.0%) when all is said and done. Company Price Rtg Community Health Systems, Inc.(CYH) HCA Holdings, Inc.(HCA) LifePoint Health, Inc.(LPNT) Tenet Healthcare Corp.(THC) $4.78 PP $97.55 OP $52.95 PP $31.12 PP Universal Health Services, Inc.(UHS) $117.77 OP Source: FactSet/Wolfe Research OP=Outperform, PP=Peer Perform, UP=Underperform, NR=Not Rated Justin Lake, CFA (646) 582-9280 jlake@wolferesearch.com Stephen Baxter, CFA (646) 582-9282 sbaxter@wolferesearch.com Andrew Mok, CFA, CPA (646) 582-9283 amok@wolferesearch.com Shehryar Amir (646) 582-9285 samir@wolferesearch.com DO NOT FORWARD DO NOT DISTRIBUTE DOCUMENT CAN ONLY BE PRINTED TWICE This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications, Important Disclosures and Other Disclosures. WolfeResearch.com Page 1 of 15
Revised Price Targets / Valuation Exhibit 1: Facility Price Targets CYH HCA LPNT THC UHS DVA Previous PT $4.5 $110 $55 $23 $142 $80 Current PT $4.5 $115 $55 $30 $142 $80 Change 0.0% 4.5% 0.0% 30.4% 0.0% 0.0% Price as of 05/06/18 $4.78 $97.55 $52.95 $31.12 $117.77 $66.38 Price Upside (5.9%) 17.9% 3.9% (3.6%) 20.6% 20.5% Stock Rating PP OP PP PP OP OP Exhibit 2: Facilities EBITDA Comparison Facilities EBITDA Comparison CYH HCA LPNT THC UHS DVA 2018 WR EBITDA $1,597 $8,574 $740 $2,601 $1,800 $2,175 2019 WR EBITDA $1,536 $8,976 $766 $2,717 $1,906 $2,254 Y/Y Growth (4%) 5% 4% 4% 6% 4% EBITDA Estimates 2018 Cons. EBITDA $1,568 $8,612 $738 $2,581 $1,785 $2,148 2019 Cons. EBITDA $1,555 $8,986 $764 $2,657 $1,880 $2,249 Y/Y Growth (1%) 4% 3% 3% 5% 5% 2018 EBITDA Variance 2% (0%) 0% 1% 1% 1% 2019 EBITDA Variance (1%) (0%) 0% 2% 1% 0% 2018 WR EV / EBITDA-NCI 9.2x 8.4x 6.7x 7.8x 8.3x 10.6x EV / EBITDA-NCI 2018 Cons. EV / EBITDA-NCI 3 9.4x 8.3x 6.7x 7.9x 8.4x 10.7x 2019 WR EV / EBITDA-NCI 9.6x 8.0x 6.5x 7.5x 7.9x 10.2x 2019 Cons. EV / EBITDA-NCI 3 9.5x 8.0x 6.5x 7.7x 8.0x 10.2x WolfeResearch.com Page 2 of 15
Exhibit 3: Wolfe Research Facilities Valuation Summary Target Multiple Valuation Current Enterprise Value Historical Relative Multiple EV / EBITDA Methodology CYH HCA LPNT THC UHS DVA Rating Peer Perform Outperform Peer Perform Peer Perform Outperform Outperform Current Price 4.78 97.55 52.95 31.12 117.77 66.38 3-Year Average Multiple 74% 75% 65% 72% 84% 84% Relative Discount / 3-Yr 109% 104% 95% 95% 97% 94% Relative Multiple Target 80% 78% 62% 68% 82% 79% S&P Multiple Current 11.0x 11.0x 11.0x 11.0x 11.0x 11.0x Target Multiple 8.8x 8.6x 6.8x 7.5x 9.0x 8.6x 2019E EBITDA - NCI $1,461 $8,411 $746 $2,269 $1,906 $2,098 Implied EV $12,907 $72,164 $5,092 $16,983 $17,155 $18,129 Net Debt at 4Q18 $12,345 $32,271 $2,828 $13,889 $3,773 $4,629 Implied Equity Value $562 $39,892 $2,264 $3,094 $13,383 $13,501 Diluted S/O at 4Q18 114 348 41 104 94 168 Price Target $4.50 $115.00 $55.00 $30.00 $142.00 $80.00 Upside / Downside (5.9%) 17.9% 3.9% (3.6%) 20.6% 20.5% Current Price $4.78 $97.55 $52.95 $31.12 $117.77 $66.38 Current Diluted S/O 112 360 39 103 95 182 Equity Value $535 $35,094 $2,065 $3,195 $11,151 $12,070 Current Net Debt $13,468 $32,205 $2,777 $13,915 $3,848 $9,016 Current Enterprise Value $14,003 $67,299 $4,842 $17,110 $14,999 $21,087 Current 85% 75% 60% 70% 76% 73% 1 Year Multiple 78% 71% 57% 68% 75% 75% 3 Year Multiple 74% 75% 65% 72% 84% 84% 5 Year Multiple 74% 80% 70% 76% 89% 91% HCA Estimates / EBITDA Bridges EBITDA 1Q18 2Q18 3Q18 4Q18 2018 2019 2020 Previous Est $2,092 $2,141 $1,948 $2,369 $8,550 $8,778 $9,044 Current Est $2,118 $2,104 $1,981 $2,370 $8,574 $8,976 $9,444 Change 1.3% (1.7%) 1.7% 0.0% 0.3% 2.3% 4.4% Consensus $2,118 $2,159 $1,972 $2,375 $8,612 $8,986 $9,274 Variance 0.0% (2.5%) 0.5% (0.2%) (0.4%) (0.1%) 1.8% In Q1 recently acquired facilities added $320M of revenue but were a ~$30M drag on EBITDA. The assets here include Memorial Health in Savannah, GA and the Houston, TX facilities acquired from THC in 2H17 (which were positive margin at the time of sale). These losses should moderate through the year and our estimates assume these facilities will reach ~16% EBITDA margins over a 2-4 year period (Houston faster, Savannah slower), providing a tailwind to EBITDA growth in 2019+. EBITDA Contribution 2018 2019 2020 2021 2022 New Store Facility Rev $1,480 $1,539 $1,601 $1,665 $1,731 New Store Facility EBITDA ($85) $21 $138 $213 $262 New Store Facility EBITDA Margin (5.7%) 1.4% 8.6% 12.8% 15.1% Y/Y Change in EBITDA NM $106 $117 $75 $49 WolfeResearch.com Page 3 of 15
Please see our EBITDA bridge below which layer s this margin ramp on top of core EBITDA growth to arrive at our estimates. As discussed below, HCA could also see a significant benefit from Medicare rates / DSH in 2019 until finalized we have not reflected that benefit in numbers. Below we show the potential impact to HCA equity value across a range of DSH outcomes ranging from $150-$250M at an 8x EBITDA multiple. Importantly we note that while our est. of HCA s 2019 DSH payment increase is in the $250m range, our early conversations with the company indicate they see benefit in the $150-$200m range. Increase in DSH Payments $150 $200 $250 EBITDA Multiple 8 8 8 Equity Value $1,200 $1,600 $2,000 2019E Share Count 343 343 343 Equity Value / Share $3.50 $4.67 $5.83 Current Share Price $97.54 $97.54 $97.54 Equity Value / Share as % 3.6% 4.8% 6.0% Exhibit 4: HCA EBITDA Bridge 2017 2020E Q1 Q2 Q3 Q4 FY 2017 Reported EBITDA $2,005 $2,090 $1,776 $2,362 $8,233 Add Back Hurricanes $140 $140 Add Back TX DSH 1x Adjustment $50 $50 Remove Flu ($25) ($25) Remove Full Oklahoma ($45) ($45) ($45) ($45) ($180) 2017 Run Rate EBITDA $1,960 $2,045 $1,921 $2,292 $8,218 Core Growth 7.6% 4.0% 4.0% 4.0% 4.8% 2018 Core EBITDA $2,108 $2,127 $1,998 $2,384 $8,616 1 Month of Oklahoma $15 $15 Add in Acquisitions ($30) ($25) ($18) ($12) ($85) Add Flu $25 $25 2018 Reported EBITDA $2,118 $2,102 $1,980 $2,372 $8,571 Y/Y Growth 5.6% 0.6% 11.5% 0.4% 4.1% Q1 Q2 Q3 Q4 FY Core Growth 4.0% 4.0% 4.0% 4.0% 2019 EBITDA, before Deals $2,192 $2,212 $2,078 $2,479 $8,961 Recent Deal EBITDA ($5) $2 $9 $16 $21 2019 Reported EBITDA $2,187 $2,214 $2,087 $2,495 $8,982 Y/Y Growth 3.3% 5.3% 5.4% 5.2% 4.8% 2020 EBITDA, before Deals $2,280 $2,300 $2,161 $2,578 $9,319 Recent Deal EBITDA $24 $31 $38 $45 $138 2020 Reported EBITDA $2,304 $2,331 $2,199 $2,623 $9,457 Y/Y Growth 5.3% 5.3% 5.4% 5.2% 5.3% WolfeResearch.com Page 4 of 15
UHS UHS reported adjusted EBITDA-NCI of $455M vs. WR/Consensus of $471M/$474M. Importantly, while EBITDA missed by ~$20M vs. consensus, it was closer to $4-5M below the company s internal expectations driven by Behavioral. Core same store rev growth in Behavioral was 3.5% vs. UHS s expectation of 4.0%, above 3.0% reported and generally consistent with recent quarters. The company still expects to return ~5% growth during 2018, although clearly visibility remains low. We have taken a hard look at estimates including a thorough review of 1xers / unusual items, which we highlight in EBITDA bridges on Page 6. As a result, our estimates are generally unchanged vs. previous. We are maintaining our $142 PT. EBITDA-NCI 1Q18 2Q18 3Q18 4Q18 2018 2019 2020 Previous Est $471 $469 $398 $458 $1,797 $1,884 $1,976 Current Est $455 $468 $400 $477 $1,800 $1,906 $1,998 Change (3.3%) (0.1%) 0.3% 4.1% 0.2% 1.2% 1.1% Consensus $455 $453 $406 $467 $1,785 $1,880 $1,968 Variance 0.0% 3.3% (1.7%) 2.1% 0.9% 1.4% 1.6% WolfeResearch.com Page 5 of 15
UHS EBITDA Bridges Exhibit 5: UHS Acute EBITDA Bridge Acute 1Q18 2Q18 3Q18 4Q18 FY18 2017 EBITDA $260 $232 $176 $262 $930 Remove Flu Impact ($9.5) ($9.5) Remove Excess CA Provider Fee Catch-Up ($6.5) ($6.5) Add Back Negative Hurricane Impact $4.5 $4.5 Add Back Negative 1x Item $5.5 $5.5 Expected Health Plan Improvement $1.9 $1.9 $1.9 $1.9 $7.5 Run Rate 2017 EBITDA $262 $239 $183 $248 $932 Core EBITDA Growth / Growth Target 4.6% 4.0% 4.0% 4.0% 4.2% 2018 Core EBITDA $274 $249 $190 $258 $970 Add Flu Impact $2.5 $2.5 2018 Reported EBITDA $276.39 $249 $190 $258 $973 Reported Growth 6.4% 7.3% 7.8% (1.6%) 4.6% Core EBITDA Growth Target 4.0% 4.0% 4.0% 4.0% 4.0% 2019 EBITDA $285 $258 $198 $268 $1,009 Exhibit 6: UHS Behavioral EBITDA Bridge Behavioral Q1 Q2 Q3 Q4 FY 2017 EBITDA $290 $290 $268 $276 $1,123 Cambian Transitional Costs $3.5 $3.5 $7.0 1x Negative DSH True-Up $13.5 $13.5 Add Back Initial Hurricane Impact $7.5 $7.5 $15.0 Subtract Run-Rate Hurricane Impact ($1.0) ($1.0) ($1.0) ($1.0) ($4.0) Add Back Initial Regulatory Impact (Shadow Mountain / Westwood / Timberlawn) $9.5 $9.5 $19.0 Subtract Run-Rate Regulatory Impact (Shadow Mountain / Westwood / Timberlawn) ($3.5) ($3.5) ($3.5) ($3.5) ($14.0) Run Rate 2017 EBITDA $289 $303 $280 $288 $1,160 Core EBITDA Growth / Growth Target 1.8% 2.0% 3.0% 4.0% 1.3% 2018 Core EBITDA $294 $309 $289 $300 $1,191 1x Severance Costs for Closed Facilities ($7.1) ($7.1) New Mississippi Facility, 2018 Impact Only (1H Drag, Normal Run-Rate in 2H) ($3.5) ($3.5) $2.0 $2.0 ($3.0) Weather Impact ($5.5) ($5.5) 2018 Reported EBITDA $277.63 $305 $291 $302 $1,175 Reported Growth (4.1%) 5.2% 8.6% 9.4% 4.6% Core EBITDA Growth 5.0% 5.0% 5.0% 5.0% 5.0% 2019 Core EBITDA $308 $324 $303 $315 $1,250 New Mississippi facility, 2019 Run Rate $2.0 $2.0 $2.0 $2.0 $8.0 2019 Reported EBITDA $310 $326 $305 $317 $1,258 WolfeResearch.com Page 6 of 15
LPNT EBITDA was in-line with consensus despite lower than expected revenue, driven by continued volume weakness (1Q18 first look here) Our estimates and PT ($55) are little changed and we reiterate our Peer Perform rating. EBITDA 1Q18 2Q18E 3Q18E 4Q18E 2018E 2019E 2020E Previous Est $191 $187 $178 $186 $743 $769 $781 Current Est $189 $187 $178 $186 $740 $766 $779 Change (1.5%) 0.0% 0.1% 0.0% (0.4%) (0.3%) (0.2%) Consensus $189 $186 $180 $185 $740 $766 $760 Variance 0.0% 0.7% (1.3%) 0.3% (0.0%) 0.1% 2.5% CYH CYH reported adjusted EBITDA of $440M vs. WR/Consensus of $424M/$423M. With lower than expected adjusted admissions of -1.9% (190 bps / 140bps below WR/Consensus), EBITDA beat was driven by stronger than expected pricing growth of 3.5% and modestly better margins. We note that the company indicated it did not see a material impact from the flu in 1Q. CYH continues to make progress with divestitures, and still expects to divest hospitals generating $2.0B of rev at MSD % during 2018 with $1.3B of gross proceeds from the divestitures. Our estimates are little changed and we reiterate our Peer Perform rating. Our PT remains $4.50. EBITDA 1Q18E 2Q18E 3Q18E 4Q18E 2018E 2019E 2020E Previous Est $424 $401 $372 $391 $1,588 $1,538 $1,539 Current Est $440 $392 $362 $403 $1,597 $1,536 $1,535 Change 3.8% (2.2%) (2.6%) 2.9% 0.6% (0.1%) (0.2%) Consensus $440 $394 $357 $389 $1,568 $1,555 $1,554 Variance 0.0% (0.4%) 1.4% 3.6% 1.9% (1.3%) (1.2%) THC Reported 1Q18 adjusted EBITDA of $665M, well above WR / Consensus of $604M/$603M and $580-$630M guide with stronger Hospital and Conifer results driving upside (1Q18 first look here). Hospital adjusted EBITDA of $402M was ~13% above our estimate of $356M. EBITDA margins of 10.2% were 110bps above our estimate and drove the beat. Conifer adjusted EBITDA of $98M was 46% above our estimate of $67M. Revenue was 3% above our estimate and margins ~700bps above our estimate with management citing a $13M benefit from contract termination fee ($10M) and customer incentive payments ($3M). THC raised full-year adjusted EBITDA guidance by $50M to $2.55-$2.65B to reflect the improved outlook for Conifer about additional margin opportunity in that business. New CEO Rittenmeyer s performance on the cost opportunity has clearly been stronger than we expected, both in terms of timing and conversion to EBITDA. From here, we expect stock performance will be driven primarily by whether the company is able to divest non-core assets at attractive multiples and if there is another significant leg to the cost cutting story (such as what we saw in Conifer this quarter). On our revised ests our PT increases by 30% to $30, but with THC shares up almost 30% last week and 105% YTD we maintain our Peer Perform rating. EBITDA 1Q18A 2Q18E 3Q18E 4Q18E 2018E 2019E 2020E Previous Est $604 $648 $606 $688 $2,546 $2,683 $2,769 Current Est $665 $673 $576 $687 $2,601 $2,717 $2,803 Change 10.2% 3.7% (4.9%) (0.1%) 2.2% 1.3% 1.2% Consensus $665 $629 $614 $696 $2,581 $2,657 $2,727 Variance 0.0% 6.9% (6.1%) (1.2%) 0.8% 2.3% 2.8% WolfeResearch.com Page 7 of 15
Proposed 2019 Medicare Inpatient Hospital Rule Proposed Medicare Inpatient Rule In April CMS released the Medicare FY2019 Hospital Inpatient Prospective Payment Systems (IPPS) proposed rule. Before accounting for Medicare Disproportionate Share (DSH) payments CMS estimates that industry rates would increase by 2.1%, with proprietary (for-profit) rates increasing by 1.7%. We also note that rates for Urban hospitals (+2.1%) are better than Rural (+1.1%). Key drivers of the +2.1% include a market basket update of 2.8%, ACA cuts worth -0.75%, productivity cuts worth -0.8%, documentation and coding benefit of +0.5% and other small adjustments adding 30-40bps. CMS estimates that changes to Medicare DSH payments for FY2019 will add an additional 130bps to rates. Including Medicare DSH, we would expect all-in reimbursement for the industry of +340bps and +300bps for the for-profits based on the proposed rule. This is modestly above our expectations and represents a solid improvement over the FY18 rates (for-profits +230bps). We also note that Medicaid DSH cuts have been delayed until FY2020. We expect rates will continue to improve from here in 2020 despite ~30bps of expected pressure from Medicaid DSH cuts given that ACA cuts (-75bps) end after 2019. Please see the impact table in Exhibit 1 on Page 2. As discussed below, DSH changes appear particularly favorable for HCA and UHS, and we estimate HCA s Medicare rate for 2019 will be 5.5-6.0% (+1.7% for-profit update before DSH, DSH +4.0%). The final rule is expected in August. DSH Adds 130 BPS to Rates, Impact Widely Varied CMS estimates that changes to Medicare DSH payments for FY2019 will add an additional 1.3% to rates for CY2019. Overall, uncompensated care payments are expected to increase by 21.9% for FY2019 with payments to for-profits increasing by 24.0%. We note this doesn t reflect the total DSH payment $, which also includes 25% of what the pre-aca uncompensated care pool would have been. Including this component, DSH payments will increase 15.7%. As a reminder the ACA changed how Medicare DSH payments worked: 25% of the payment pool is fully paid out and how much of the remaining 75% is paid out is based on how much the uninsured rate has decreased post-aca. The size of the pre-aca pool is increasing by ~3.4%, while the % of remaining 75% paid out increases to 67.5% for 2019 from 55.4% in 2018 due to an increase in the uninsured rate. CMS is phasing in a new methodology for how it allocates these $ to individual hospitals, which leads to above / below average DSH changes for some companies. Our analysis indicates that HCA (+52%, +$250M) and UHS (+49%, +$35M) appear set to see larger increases with LPNT (+9%, $5M), THC (+2%, +$4M) and CYH (+1%, +$2M) below average increases. CMS Making Changes to DSH Allocation CMS continuing to incorporate long-discussed changes to how it allocates Medicare DSH payments among individual hospitals. Historically CMS has used data on a hospital s share of low-income insured days (defined as Medicaid and SSI days) as a proxy for uncompensated care. Given the relatively low correlation between this metric and uncompensated care costs CMS introduced a new form to collect and better measure this data (Worksheet S-10). For FY2019 CMS proposes to use 2 years of data from Worksheet S-10 and 1 year of data under the old methodology, with a view to phase out the old methodology by FY2020. With both the proposed and final rule CMS releases a supplemental data set with each hospital s allocation % that allows us to build up company-specific estimates of DSH payments. Overall DSH payments are expected to increase by 23% on average across our companies. HCA (+52%, +$250M) and UHS (+49%, +$35M) appear set to see larger increases with LPNT (+9%, $5M), THC (+2%, +$4M) and CYH (+1%, +$2M) below average increases. Rolling Forward DSH Changes As discussed above, for 2019 CMS is blending two different DSH allocation methodologies and for 2020 plans to fully phase out the old allocation methodology. CMS provides the supporting detail, allowing us to recalculate the allocation percentages excluding the old methodology which should provide directional insight into how allocations will change next year, all else being equal. Holding the $ of DSH payment flat, we estimate HCA would see a $30M tailwind and THC would face a $45M headwind. See Exhibit 4 on Page 4 for details. WolfeResearch.com Page 8 of 15
Exhibit 7: Impact Analysis of Proposed Changes to the IPPS for FY 2019 Source: CMS Exhibit 8: Modeled DSH Proposed Payments for Estimated FY2019 by Hospital Type Source: CMS WolfeResearch.com Page 9 of 15
Exhibit 9: Analysis of DSH Payment Changes, 2019 Legacy DSH ACA Impacted Total Prior Year Change Change, % Industry $4,073,675,985 $8,250,415,972 $12,324,091,957 $10,654,930,045 $1,669,161,912 15.7% CYH $64,111,513 $129,845,047 $193,956,559 $191,598,273 $2,358,286 1.2% HCA $242,431,570 $490,996,660 $733,428,230 $482,624,582 $250,803,648 52.0% LPNT $20,458,392 $41,434,381 $61,892,773 $56,854,398 $5,038,375 8.9% THC $69,707,489 $141,178,577 $210,886,066 $207,180,043 $3,706,023 1.8% UHS $35,271,056 $71,434,469 $106,705,525 $71,845,778 $34,859,747 48.5% Exhibit 10: Estimate of DSH Allocation Changes on 2020, Holding 2019 $ Flat DSH Allocation %s 2020 Estimated 2019 Change vs. 2019 Total Pool $ Impact CYH 0.01472979 0.01573800 (0.00100821) $12,324,091,957 ($12,425,229) HCA 0.06205324 0.05951175 0.00254150 $12,324,091,957 $31,321,661 LPNT 0.00477597 0.00502210 (0.00024612) $12,324,091,957 ($3,033,240) THC 0.01346572 0.01711169 (0.00364597) $12,324,091,957 ($44,933,308) UHS 0.00922488 0.00865829 0.00056659 $12,324,091,957 $6,982,715 WolfeResearch.com Page 10 of 15
DISCLOSURE SECTION Analyst Certification: The analyst of Wolfe Research, LLC primarily responsible for this research report whose name appears first on the front page of this research report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the research analysts personal views about the subject securities or issuers and (ii) no part of the research analysts compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this report. Important Disclosures: Price Chart with Ratings and Target Price History WolfeResearch.com Page 11 of 15
Note: OP = Outperform; PP = Peer Perform; UP = Underperform Wolfe Research, LLC Fundamental Valuation Methodology: Company: Fundamental Valuation Methodology: CYH EV / EBITDA less Noncontrolling Interest HCA EV / EBITDA less Noncontrolling Interest LPNT EV / EBITDA less Noncontrolling Interest THC EV / EBITDA less Noncontrolling Interest UHS EV / EBITDA less Noncontrolling Interest Wolfe Research, LLC Fundamental Recommendation, Rating and Target Price Risks: Company: Risks That May Impede Achievement of the Recommendation, Rating or Target Price: CYH Industry downside risks include rate pressure from commercial or government payers, WolfeResearch.com Page 12 of 15
increased bad debt expense as more financial responsibility is shifted to the patient, pressure on volumes from economic weakness, pressure on volumes from payer efforts to reduce the use of costly hospital services, changes to Health Care Reform legislation resulting in fewer people having health insurance coverage, pressure on labor costs due to nurse and physician shortages, expense pressure from drug cost inflation and the risk of government investigations. Company specific downside risks include the persistence of weak volume trends, inability to meet expense reduction targets, inability to complete asset sales and high debt levels. HCA LPNT Industry upside risks include changes to Health Care Reform legislation resulting in more people having health insurance coverage, more states electing to expand Medicaid eligibility under the current law and the aging of the population driving increased use of hospital services. Company specific upside risks include improving volume trends, achieving expense reduction targets and the potential that the company is acquired given that it has confirmed holding discussions with financial sponsors. Industry downside risks include rate pressure from commercial or government payers, increased bad debt expense as more financial responsibility is shifted to the patient, pressure on volumes from economic weakness, pressure on volumes from payer efforts to reduce the use of costly hospital services, changes to Health Care Reform legislation resulting in fewer people having health insurance coverage, pressure on labor costs due to nurse and physician shortages, expense pressure from drug cost inflation and the risk of government investigations. Company specific downside risks include slowing volume trends and a continued moderation in the company s ability to drive market share gains due to increased competition. Industry downside risks include rate pressure from commercial or government payers, increased bad debt expense as more financial responsibility is shifted to patients, demographic / economic pressure on volumes, pressure on volumes from payer efforts to reduce the use of costly hospital services, changes to Health Care Reform legislation resulting in fewer people having health insurance coverage, pressure on labor costs due to nurse and physician shortages, expense pressure from drug cost inflation and the risk of government investigations. Company specific downside risks include the persistence of weak volume trends, the inability to meet achieve margin targets on acquired facilities and a lack of value-creating portfolio management / divestiture activity. Industry upside risks include changes to Health Care Reform legislation resulting in more people having health insurance coverage, more states electing to expand Medicaid eligibility under the current law and any sustained improvement in utilization of hospital services. Company specific upside risks include the potential for value-creating portfolio management / divestiture activity, the potential for improving core results and an improvement in valuation (trades roughly 2 turns below peers on EV / EBITDA). THC UHS Industry downside risks include rate pressure from commercial or government payers, increased bad debt expense as more financial responsibility is shifted to the patient, pressure on volumes from economic weakness, pressure on volumes from payer efforts to reduce the use of costly hospital services, changes to Health Care Reform legislation resulting in fewer people having health insurance coverage, pressure on labor costs due to nurse and physician shortages, expense pressure from drug cost inflation and the risk of government investigations. Company specific downside risks include the weakening volume trends, difficulty achieving hospital growth targets, slowing growth of the ambulatory business and high debt levels. Industry upside risks include changes to Health Care Reform legislation resulting in more people having health insurance coverage, more states electing to expand Medicaid eligibility under the current law and the aging of the population driving increased use of hospital services. Company specific upside risks include improved core hospital growth. Industry downside risks include rate pressure from commercial or government payers, increased bad debt expense as more financial responsibility is shifted to the patient, pressure on volumes from economic weakness, pressure on volumes from payer efforts to reduce the use of costly hospital services, changes to Health Care Reform legislation resulting in fewer people having health insurance coverage, pressure on labor costs due to nurse and physician shortages, expense pressure from drug cost inflation and the risk of government investigations. Company specific downside risks include slowing volume WolfeResearch.com Page 13 of 15
Wolfe Research, LLC Research Disclosures: Company: Research Disclosures: CYH None HCA None LPNT None THC None UHS None Other Disclosures: Wolfe Research, LLC Fundamental Stock Ratings Key: Outperform (OP): Peer Perform (PP): Underperform (UP): trends, an inability to address behavioral staffing issues, potential negative media coverage and ongoing government investigations. The security is projected to outperform analyst's industry coverage universe over the next 12 months. The security is projected to perform approximately in line with analyst's industry coverage universe over the next 12 months. The security is projected to underperform analyst's industry coverage universe over the next 12 months. Wolfe Research, LLC uses a relative rating system using terms such as Outperform, Peer Perform and Underperform (see definitions above). Please carefully read the definitions of all ratings used in Wolfe Research, LLC research. In addition, since Wolfe Research, LLC research contains more complete information concerning the analyst s views, please carefully read Wolfe Research, LLC research in its entirety and not infer the contents from the ratings alone. In all cases, ratings (or research) should not be used or relied upon as investment advice and any investment decisions should be based upon individual circumstances and other considerations. Wolfe Research, LLC Sector Weighting System: Market Overweight (MO): Market Weight (MW): Market Underweight (MU): Expect the industry to outperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months. Expect the industry to perform approximately in line with the primary market index for the region (S&P 500 in the U.S.) over the next 12 months. Expect the industry to underperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months. Wolfe Research, LLC Distribution of Fundamental Stock Ratings (As of March 31, 2018): Outperform: 41% 3% Investment Banking Clients Peer Perform: 50% 2% Investment Banking Clients Underperform: 9% 4% Investment Banking Clients Wolfe Research, LLC does not assign ratings of Buy, Hold or Sell to the stocks it covers. Outperform, Peer Perform and Underperform are not the respective equivalents of Buy, Hold and Sell but represent relative weightings as defined above. To satisfy regulatory requirements, Outperform has been designated to correspond with Buy, Peer Perform has been designated to correspond with Hold and Underperform has been designated to correspond with Sell. Wolfe Research Securities and Wolfe Research, LLC have adopted the use of Wolfe Research as brand names. Wolfe Research Securities, a member of FINRA (www.finra.org) is the broker-dealer affiliate of Wolfe Research, LLC and is responsible for the contents of this material. Any analysts publishing these reports are dually employed by Wolfe Research, LLC and Wolfe Research Securities. The content of this report is to be used solely for informational purposes and should not be regarded as an offer, or a solicitation of an offer, to buy or sell a security, financial instrument or service discussed herein. Opinions in this communication constitute the current judgment of the author as of the date and time of this report and are subject to change without notice. Information herein is believed to be reliable but Wolfe Research and its affiliates, including but not limited to Wolfe Research Securities, makes no representation that it is complete or accurate. The information provided in this communication is not designed to replace a recipient's own decision-making processes for assessing a proposed transaction or investment involving a financial instrument discussed herein. Recipients are encouraged to seek financial advice from their financial advisor regarding the appropriateness of investing in a security or financial instrument referred to in this report and should understand that statements regarding the future performance of the financial instruments or the securities referenced herein may not be realized. Past performance is not indicative of future results. This report is not intended for distribution to, or use by, any person or entity in any location where such distribution or use would be contrary to applicable law, or which would subject Wolfe Research, WolfeResearch.com Page 14 of 15
LLC or any affiliate to any registration requirement within such location. For additional important disclosures, please see www.wolferesearch.com/disclosures. The views expressed in Wolfe Research, LLC research reports with regards to sectors and/or specific companies may from time to time be inconsistent with the views implied by inclusion of those sectors and companies in other Wolfe Research, LLC analysts research reports and modeling screens. Wolfe Research communicates with clients across a variety of mediums of the clients choosing including emails, voice blasts and electronic publication to our proprietary website. Copyright Wolfe Research, LLC 2018. All rights reserved. All material presented in this document, unless specifically indicated otherwise, is under copyright to Wolfe Research, LLC. None of the material, nor its content, nor any copy of it, may be altered in any way, or transmitted to or distributed to any other party, without the prior express written permission of Wolfe Research, LLC. This report is limited for the sole use of clients of Wolfe Research. Authorized users have received an encryption decoder which legislates and monitors the access to Wolfe Research, LLC content. Any distribution of the content produced by Wolfe Research, LLC will violate the understanding of the terms of our relationship. WolfeResearch.com Page 15 of 15