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Community Health Down 16% in a Year: Can it Bounce Back?
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Community Health Systems, Inc. (CYH - Free Report) has been plagued with various issues so far this year. Low revenues and earnings, high debt, faltering patient admissions, struggles with its numerous underperforming hospitals eroded investors confidence in the company.
Notably, the company’s shares have fallen 15.73% year to date, against the industry’s growth of 36%.
The scenario looks further discouraging compared with the performance of other players in the industry. For instance HCA Healthcare Inc. (HCA - Free Report) and Tenet Healthcare Corp. (THC - Free Report) have both witnessed a gain of 57%, while LifePoint Health, Inc. grew 31% in the same time frame.
Factors Behind the Decline
The acquisition of Health Management Associates in 2014 was the beginning of troubles for Community Health. The deal was made in an effort to gain scale and expand geographically. However, a huge debt load (deal price was $3.9 billion and debt was $3.7 billion), financial and legal troubles came as part of the deal. Recently, the company agreed to pay $266 million to settle whistleblower lawsuits against HMA. Notably, HMA was charged for intentionally and systematically getting patients admitted to hospitals, without any requirement for the same and then charging the government for those unnecessary admissions.
Along with the debt burden, the company has also been plagued with dwindling patient admissions for several past quarters. Consequently, this has taken a toll on its revenues which has been declining from 2016 through the first nine months of 2018. High operating cost and constrained revenues weighed on EBIDTA which has been falling from 2015 through the first nine months of 2018.
Additionally, doubts remain over on the company’s ability to cover its interest expense. Its times interest earned ratio, which measures the company’s interest paying ability has deteriorated from -0.8% in 2016 to -1.9% as of Sep 30, 2018. The company is running a stockholders’ deficit of $1.2 billion as of Sep 30, 2018.
Actions Taken
In response, the company has taken undertaken hospital divestitures to weed out unprofitable ones. This will enable the company to consolidate operations and generate funds to pay down debt and reduce leverage ratio to strengthen capital position.
As part of its ongoing portfolio rationalization efforts, the company sold 30 hospitals during 2017. The company’s current divestiture plan calls for divestment of hospitals that accounted for at least $2 billion of net revenues in the full year of 2017 and mid-single-digit EBITDA margin. These asset sales are expected to generate approximately $1.3 billion of gross proceeds.
Overall, the company anticipates volumes to improve from portfolio rationalization execution of core operational strategies. The company expects these strategies along with its continuous focus on expense management to aid it in driving improved same-store net revenues and EBIT growth over the next 6 to 12 months.
Moreover, the company gets paid by the government on Medicaid and Medicare accounts. The company mentioned that in contrast to full year 2016 and 2017, the Medicare and Medicaid environment has been more stable. It expects the environment to remain stable moving into 2019. This is likely to remove the reimbursement pressure and aid earnings from Medicaid and Medicare businesses.
Other multi pronged growth initiatives are formation of Accountable Care Organizations, investment in outpatient facilities and other expense reduction efforts.
For 2018, the company full-year guidance includes same-store adjusted admission growth is anticipated to be down 1% to flat, net operating revenues less provision for doubtful accounts to be between $14 billion to $14.2 billion (translates into year-over-year decline of 8%). Adjusted EBITDA is anticipated to be $1.6 billion to $1.65 billion, up 31% year over year.
Income from continuing operations per share is anticipated to be negative $2.25 to $2.10 based on the weighted average diluted shares of nearly 113 million. This is wider than the loss of $1.19 per share reported in 2017.
Though the guidance still does not point the company’s total reversal to profitability, but we believe that the numerous growth initiatives will gradually help it recover.
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Community Health Down 16% in a Year: Can it Bounce Back?
Community Health Systems, Inc. (CYH - Free Report) has been plagued with various issues so far this year. Low revenues and earnings, high debt, faltering patient admissions, struggles with its numerous underperforming hospitals eroded investors confidence in the company.
Notably, the company’s shares have fallen 15.73% year to date, against the industry’s growth of 36%.
The scenario looks further discouraging compared with the performance of other players in the industry. For instance HCA Healthcare Inc. (HCA - Free Report) and Tenet Healthcare Corp. (THC - Free Report) have both witnessed a gain of 57%, while LifePoint Health, Inc. grew 31% in the same time frame.
Factors Behind the Decline
The acquisition of Health Management Associates in 2014 was the beginning of troubles for Community Health. The deal was made in an effort to gain scale and expand geographically. However, a huge debt load (deal price was $3.9 billion and debt was $3.7 billion), financial and legal troubles came as part of the deal. Recently, the company agreed to pay $266 million to settle whistleblower lawsuits against HMA. Notably, HMA was charged for intentionally and systematically getting patients admitted to hospitals, without any requirement for the same and then charging the government for those unnecessary admissions.
Along with the debt burden, the company has also been plagued with dwindling patient admissions for several past quarters. Consequently, this has taken a toll on its revenues which has been declining from 2016 through the first nine months of 2018. High operating cost and constrained revenues weighed on EBIDTA which has been falling from 2015 through the first nine months of 2018.
Additionally, doubts remain over on the company’s ability to cover its interest expense. Its times interest earned ratio, which measures the company’s interest paying ability has deteriorated from -0.8% in 2016 to -1.9% as of Sep 30, 2018. The company is running a stockholders’ deficit of $1.2 billion as of Sep 30, 2018.
Actions Taken
In response, the company has taken undertaken hospital divestitures to weed out unprofitable ones. This will enable the company to consolidate operations and generate funds to pay down debt and reduce leverage ratio to strengthen capital position.
As part of its ongoing portfolio rationalization efforts, the company sold 30 hospitals during 2017. The company’s current divestiture plan calls for divestment of hospitals that accounted for at least $2 billion of net revenues in the full year of 2017 and mid-single-digit EBITDA margin. These asset sales are expected to generate approximately $1.3 billion of gross proceeds.
Overall, the company anticipates volumes to improve from portfolio rationalization execution of core operational strategies. The company expects these strategies along with its continuous focus on expense management to aid it in driving improved same-store net revenues and EBIT growth over the next 6 to 12 months.
Moreover, the company gets paid by the government on Medicaid and Medicare accounts. The company mentioned that in contrast to full year 2016 and 2017, the Medicare and Medicaid environment has been more stable. It expects the environment to remain stable moving into 2019. This is likely to remove the reimbursement pressure and aid earnings from Medicaid and Medicare businesses.
Other multi pronged growth initiatives are formation of Accountable Care Organizations, investment in outpatient facilities and other expense reduction efforts.
For 2018, the company full-year guidance includes same-store adjusted admission growth is anticipated to be down 1% to flat, net operating revenues less provision for doubtful accounts to be between $14 billion to $14.2 billion (translates into year-over-year decline of 8%). Adjusted EBITDA is anticipated to be $1.6 billion to $1.65 billion, up 31% year over year.
Income from continuing operations per share is anticipated to be negative $2.25 to $2.10 based on the weighted average diluted shares of nearly 113 million. This is wider than the loss of $1.19 per share reported in 2017.
Though the guidance still does not point the company’s total reversal to profitability, but we believe that the numerous growth initiatives will gradually help it recover.
Community Health carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
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