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We upgrade our recommendation on Health Management Associates to Neutral. The company reported third quarter adjusted earnings per share of 18 cents missing the Zacks Consensus Estimate by a penny.

Revenues (prior to provisioning for doubtful clients) increased almost 19% year over year to $1,664.2 million, easily surpassing the Zacks Consensus Estimate of $1,655 million. Net revenues improved 18.1% year over year to 1,440.1 million. Net revenues from same hospital (continuing operations) increased 4.5% to $1,274.1 million.

On same hospital basis, occupancy declined to 38.9% in the third quarter from 41.1% in the prior year quarter. Same hospital admissions and adjusted admissions also dipped 6.4% and 2.2%, respectively, while surgeries and emergency room visits increased 0.8% and 4.2%, respectively.

For 2012, Health Management narrowed its forecast for earnings in the band of 80 cents and 85 cents compared with the prior guidance of 80 cents to 90 cents per share. The forecast revision is associated with higher fixed expenditure related to two new replacement hospitals.

The forecast excludes about $103 million to $107 million (or 26 cents to 27 cents per share) of effect from mark-to-market orientation and interest rate swap as well as Medicare and Medicaid HCIT incentive payments in the range of $90 million to $100 million (or 23 cents to 25 cents per share).

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 Lifepoint Hospitals (LPNT - Snapshot Report).

Health Management benefits from a gradual growth in admissions largely due to improvement in Emergency Room, sustained physician recruitment and service development. Moreover, it is well placed to expand margins from continuing operations and drive above-industry average earnings growth. While the debt burden remains sizeable, we are somewhat comforted that bad debt is no longer an area of urgent concern.

We are currently Neutral on the stock. The stock currently retains a Zacks #4 Rank, which translates into a short-term “Sell” rating.

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