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Life Point Health Strategic Acquisitions Impress Amid Risks

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We have initiated coverage on hospital operator, LifePoint Health Inc. LPNT.

Year to date, shares of the company have tanked by 21.3% compared with the Zacks categorized Medical Hospital industry’s decline of 9%. The underperformance indicates the headwinds faced by the company. LifePoint Health is plagued by issues like less profitable acquisitions that have drained its bottom line, high volumes of uninsured patients increasing bad debts, earnings volatility related to seasonal trends like flu, declining levels of short-stay admissions, and reduced readmissions, to name a few.


Despite underperforming the sector, the company has delivered better performance than other players in the industry like Tenet Healthcare Corporation (THC - Free Report) , and Community Health Systems, Inc. CYH that declined by 51.5% and 78.4%, respectively.

Established in 1999, LifePoint Health owns and operates hospitals and healthcare services in 72 non-urban communities in 22 states. The company is now focusing on strategic growth through acquisitions and integration of well-positioned hospitals in faster growing areas of the U.S. The company considers buyouts to be strong opportunities to support its communities and build upon the excellent healthcare, growing margins, and operations in attractive new markets.

The company’s acquisition pipeline remains strong and it sees several potential opportunities, including hospitals, health systems, and end-market transactions to build key services. Going forward, we expect the company to undertake more acquisitions to boost its top line. Along with acquiring businesses, the company has been divesting non-core operations to focus on core growth areas.

It also boasts a strong balance sheet with ample liquidity as evident from its free cash flow that has increased every year from 2006 to 2015, except the years 2012 and 2013. The company utilizes cash for share buybacks and acquisitions to drive earnings. However, free cash flow is expected to remain under pressure due to increased use of cash for working capital, higher capital expenditures, and lower profitability (owing to declining levels of short-stay admissions and reduced readmissions).

The company is also bothered by its expenses that have increased at a CAGR of 12% from 2006–2015, higher than the growth rate of revenues of 9.33% over the same time frame. If the trend persists, it will drain the company’s bottom line, eroding its profitability.

The company is also suffering from the integration of less profitable acquisitions, which has been limiting its profitability.

Zacks Rank

LifePoint carries a Zacks Rank # 3 (Hold). A better-ranked stock in the same sector is HCA Holdings, Inc. HCA. The stock carries a Zacks Rank # 2 (Buy). The company has posted a positive earnings surprise in each of the last four reported quarters with an average beat of 14.01%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 

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