Wedbush analyst, Sarah James, thinks investors are undervaluing HCA Holdings (NYSE: HCA) longer term capital deployment potential EPS accretion and Parallon’s potential growth. No change to Outperform rating but PT increases to $90 from $88.

Adjusted EBITDA of $2.0B was below consensus of $2.03B due to higher than expected labor costs and other operating expenses but partially offset by stronger than expected equivalent admissions.

HCA’s total surgeries were up 3.3% v 2.0% this time last year driven by significant growth in outpatient up 4.4% though coming off a low comp of 1.4%. Management saw surgical volume strength in 1Q16 coming from cardiovascular, orthopedic and general surgery categories. Strong results from medical device and supply companies and increased surgical volumes from hospitals is in contrast to insurers seeing no uptick in surgical volumes. The debate is whether this could be another goldilocks scenario where ACA growth drives volumes and mix shift/bundling drives device sales while not causing issue for insurer, or alternatively if the ramp up occurred late in 1Q and given the potential 30 day adjudication cycle for hospital claims the insurers are victims of a claims lag and are setting up for a weak 2Q16.

HCA is focused on investing in service-lines that increase acuity mix, this is somewhat offset from a mix perspective by growth in urgent care (20% y/y) and free standing ER (27%) facilities. Cardio procedures were up 5%, trauma 27%, observation visits 13% and urgent care 22%. Revenue per adjusted admission were up 2.2% v. FY guide of 2-3%.

Initial benefit of integrating Tenet into HCA’s HealthTrust purchasing group encouraging; $20-27B purchasing power. The higher market share is driving better pricing from vendors and improved supply chain management. The company is seeing early signs of benefit from the pharmacy consolidation initiative where they embed pharmacists on the floor to ensure optimized utilization and get a better read on storage and inventory which helps in managing procurement.

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Shares of HCA Holdings closed at $79.06 yesterday.