Hospital Owner at a 14% FCF Yield

Owner of high quality assets (39% ROIC, 20 years of consistent FCF) that has recently changed its corporate strategy and capital allocation; now buying back shares at a 7-8x FCF

Durability is the first thing I look for with any equity investment.

Owning a stake in a hospital that collects fees on elective surgeries in a location where competition is modest is an example of a durable stream of cash flow.

It’s even better when you have a small collection of such hospitals that are conservatively financed, give you nice cash flow streams that can be reinvested at ~12-15% returns by buying back your own stock that trades at 7-8x FCF.

Some stocks are great because the business has organic reinvestment runway. Other stocks are great because the stock itself is cheap enough to create its own reinvestment runway (e.g. even a no growth company buying back shares at a 15% FCF yield will compound value at the same rate as 15% grower that reinvests all its earnings).

This company provides the cheap valuation + buyback type of reinvestment opportunity — which sometimes makes for an even better investment than the compounders thanks to the possible tailwind of the P/E multiple rising over time.

David Einhorn recently has recently talked about the idea that if you find a stock that offers, say, a 20% FCF yield and you’re getting that yield as a buyback + dividend, you don’t need the market to ever value your stock properly — you’ll earn 20% returns with no growth and no multiple expansion.

This stock loosely fits this mold. The valuation might rise but it’s okay (even beneficial) if it doesn’t. I like owning safe and cheap stocks with predictable cash flows that are buying back shares (shares outstanding have declined 22% in just the last two years)…