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On Nov 22, we maintained our Neutral recommendation on Health Management Associates Inc. . Although HMA posted a loss of one cent per share and missed the Zacks Consensus Estimate by 17 cents per share for the third quarter of the year, we are optimistic about its merger with the Community Health Systems, Inc. (CYH - Snapshot Report).

Why Maintained?

On Nov 13, Health Management Associates reported third quarter net revenues that slipped 1.2% to $1,421.2 million, slightly missing the Zacks Consensus Estimate of $1,455 million. Same hospital net revenues were $1.4 billion while same hospital net revenues per adjusted admission dipped 3.1% in the quarter.

Based on the weak third-quarter results, pressure on the top line and ongoing weakness in admissions, HMA lowered its outlook for 2013. Net revenues (before the provision for doubtful accounts) are expected to range between $6.84 and $6.86 billion.

Earlier, in July 2013, net revenues (before bad debt expense) were envisaged in the band of $6.80−$7.00 billion, which included the positive impact from the company’s stake in Bayfront Health System.

Health Management forecasts EPS from continuing operations in the range of 48−50 cents, down from the prior guidance of 59−70 cents (excluding interest rate swap expense of $75−$85 million). Current guidance includes an impact of $60−$65 million of expected HCIT payments in the fourth quarter and $10−$15 million of anticipated negative impact associated with Blue Cross/Blue Shield relations in Mississippi during the same period.

Following the release of third quarter results, the Zacks Consensus Estimate for 2013 earnings fell 17.2% to 48 cents per share. The Zacks Consensus Estimate for 2014 earnings also dipped 13.4% to 71 cents per share.

Despite weak results and guidance, the merger agreement with Community Health Systems, which continues to proceed on the right track with expected completion in the first quarter of 2014, is expected to benefit shareholders.

Community Health Systems will take over Health Management for about $7.6 billion (including the latter’s debt of $3.7 billion) in cash and stock. HMA stockholders will own about 16% of the shares of the combined entity following the completion of the transaction

Other Stocks to Look For

Some better ranked stocks that are performing well in the med-hospitals industry include Acadia Healthcare Company, Inc. (ACHC - Snapshot Report) and HCA Holdings, Inc. (HCA - Snapshot Report). Both of them carry a Zacks Rank #2 (Buy).

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