We reiterate our Neutral rating on Health Management Associates ( HMA - Analyst Report ) . Its first-quarter 2012 earnings per share of 24 cents beat the Zacks Consensus Estimate of 22 cents. Net income from continuing operations dropped 29.4% year over year to $39.1 million. Consolidated net income dropped 32.1% to $37.7 million (or 15 cents per share).

Revenues (prior to provisioning for doubtful clients) increased 18.2% year over year to $1,686.5 million, beating the Zacks Consensus Estimate of $1,618 million. Net sales from same hospital (continuing operations), operated for at least a year, rose 5.7% to $1,326 million.

Health Management runs hospitals in select non-urban markets mostly in south eastern U.S. The company continues to emphasize its three long-standing initiatives, namely Emergency Room operations, physician recruitment and market development, which have facilitated admissions.

We are relieved that bad debt is no longer an area of looming concern. We expect Health Management’s bad debt expense to be restrained in fiscal 2012.

The company has indicated its willingness to deploy free cash flow for acquisitions. It purchased Wuesthoff Health System in 2010. In July 2011, Health Management acquired certain assets of Mercy Health Partners (a subsidiary of Catholic Health Partners) based in east Tennessee. In February 2012, a subsidiary of the company inked a definitive agreement with Integris Health for a joint venture deal involving five hospitals in Oklahoma.

On the negative side, we are concerned about soft same hospital admissions in the concerned markets and the company’s ability to quickly absorb hospitals. Sizeable debt remains on the balance sheet. Health Management derives certain free cash flow conferring it with sufficient debt servicing capability, for its category. The company’s contracts with commercial managed care organizations partially mitigate its exposure to government programs, Medicare/Medicaid.

Health Management is engaged in the ownership and operation of general acute care hospitals in non-urban communities across the U.S. The company is an active acquirer of underperforming hospitals with a turnaround potential in high-growth markets. Health Management’s competitors, in niche markets, include Community Health Systems ( CYH - Snapshot Report ) and LifepointHospitals ( LPNT - Snapshot Report ) .