Deutsche Bank Markets Research Rating Buy North America United States Health Care Health Care Facilities and Services (kimi)0117 HCA Holdings, Inc. HCA N HCA US NYS Q4 surgery/mix recovering; 2014 / ACA outlook conservative Reiterate Buy. F ICA's it:sure: demomtrate best in breed (14 operating metrics were not given at time of early Jan. +ve pre-anncmt. Actual results highlight a recovery in surgical trends, which boosted pricing/mix and helped drive solid C14 EBITDA growth (+6.7% YoY) despite weaker inpt medical trends and a tough vol comp. HCA provided initial ACA guidance, but mgmt may revisit assumptions on key ACA variables mid-year given how fluid the roll-out is. For 2014. ACA initially guided -$100M (+1.5%) EBITDA benefit underpinned by 7%-9% reduction in uninsured and slight offset by pricing/vol impact for exchange mix. Given strong organic growth trends in recent Qs, we believe 2014 EBITDA guidance should prove conservative. Q4 CC.: tal.oawaytt fret:O1(S uview rn Itcrely of note) 11) Volume/prbIng metrics: surgery the bigger story. Weak SS inpt admits (- 1.8%) reflect tough comp, lower flu trends and -50 bps from 2-midnight rule. Importantly. HCA does not see 2-midnight rule having material financial impact. The bigger vol story in O4 (and last 3 Qs) is surgeries; Q4 surg vol (+1.4%) and strength in higher-acuity areas (cardio, ortho, neuro) helped drive pricing (RPAA) +4.8% YoY. The ratio of inpt surg / inpt admit rose to 30% (from -29% avg past 2 yrs) and ratio is 200-300 bps below peak. A sustained rebound in surgical mix could be an upside risk to guidance. '(2) 2014 guidance assumes 1%-4% EBITDA growth. Underlying assumptions (ex. ACA) include 1-2% adj. admit (vol) growth. 2-3% RPAA (pricing) growth and flat margins. Given 2H'13 RPAA growth (+4%) and recovery in surg. RPAA seems conservative. Guidance assumes adj. vols improve vs. 2013 flat. The key headwinds built-into guidance: $120M lower YoY HITECH and $55M higher YoY stock comp which impact growth by 300 bps vs. DBe orig est 200 bps. We believe guidance implies 2%-5% base growth ex headwinds and ACA. '(3) ACA commentary: a reasonable starting point. HCA framed ACA impact as a L-T positive, but key variables remain very fluid this year including: (I) enrollment for exchange and Medicaid; (2) net new lives; (3) networks and plan selection of exchange products. HCA assumes 7-9% reduction of uninsured (reasonable) but offset somewhat due to leakage and pricing (conservative). Updated estimates: modest adjustment:- to reflect HI TECH, slower /AGA ramp 2014 EBITDA / EPS are $7.056 / $3.92 from $7.1456 / $4.17. We come out above guidance (56.606-$6.856 EBITDA / S3.45-$3.75 EPS ) due to underlying growth and ACA. Our model now reflects higher S/O, slightly lower HITECH benefit, slightly lower ACA ramp but slightly better rate/mix. Valuation and risks: PT remains at $58 or 7.5x 2015 EV/EBITDA Our target multiple is in-line with group's L-T average of 6.5x-7.5x. Key risks: implementation of PPACA, payer mix changes, Medicare/Medicaid cuts. no/I-co+ Year End Dec 31 2013A 2014E 2015E N EPS (USD) 3.42 3.92 4.77 EWEN TDA 7.2 7.1 6.2 Adiustod EBITDA 6.574 7.048 7.749 Sow< Oa ssay 64nk egvnarn COMPOIN sea Six IWO, h • enpoct of FA$Ifl nqurng the nvon.ong Of mock optee4 4 February 2014 Results Price at 3 Feb 2013105131 48.46 Price Tartlet 58.00 52-week ranee 51.41 - 35.21 Oarreu Letirteli Research Analyst (+11 212 250-2629 [email protected] Nniwklvietn Research Associate (+11 212 260.3070 [email protected] Darla pantie. CFA Research Associate (+11 212 250-6587 [email protected] IPTieoiptice mcam 'app. ;roc SIP 06)111,EX 0..tbasten Performance (%I 1n1 3m 12m Absolute .0.6 2.4 26.8 S&P 600 INDEX awn Cana Sat -4.9 -1.1 15.1 Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SONY-0110321 CONFIDENTIAL SDNY_GM_00256505 EFTA01452968