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Community Health Lags Industry YTD: Will it Reverse in 2020?

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Community Health Systems, Inc. (CYH - Free Report) is poised for growth in 2020 on the back of declining expenses and hospital divestitures.

Year to date, this Zacks Rank #3 (Hold) stock has dipped 0.7% versus its industry’s growth of 21.7%. This share price depreciation looks grave in the light of other players’ performances, such as Tenet Healthcare Corporation (THC - Free Report) , HCA Healthcare, Inc. (HCA - Free Report) and Universal Health Services, Inc. (UHS - Free Report) , which have surged 127%, 19.1% and 22.6%, respectively, over the same time frame.

Its earnings managed to surpass the Zacks Consensus Estimate in three of the trailing four quarters, the average beat being 16%.

Reasons for Its Underperformance

The company suffered volatility substantially due to high debt level. Moreover, its cash flow from operations has been declining over the past few years. In the first nine months of 2019, the metric tumbled 57% year over year.

Community Health’s revenues started falling since 2016 on lower admissions caused by a decreasing number of hospitals. In the first nine months of 2019, the company’s revenues were down 7.3% year over year, mainly due to weak admissions. However, the company is taking initiatives to improve its admissions.

Following third-quarter results, the company revised its outlook for 2019. Loss per share from continuing operations is now estimated between $1.75 and $1.85 compared with the previous guidance of $1.65-$2. Moreover, revenues are projected between $12.9 billion and $13.2 billion, the mid-point being 2% below the 2018 reported figure. Adjusted EBITDA is estimated in the band of 1.6-$1.65 billion, indicating 1% slip from the prior-year reported number. Same-store adjusted admission is likely to inch up 1.5-2%. Capital expenditure is predicted within $420-$475 million compared with the earlier guidance of $450-$550 million.

Will It Bounce Back in 2020?

Although the stock has suffered for some time, we expect it to rebound going forward. Its long-term growth rate stands at 15.3%, above the industry's average of 12.1%.

Over the years, acquisitions have played a key role in building Community Health’s growth trajectory. The company plans to take over about two to four facilities every year. It continues to acquire hospitals to expand its number of licensed beds. This, in turn, bodes well for the company.

Community Health’s restructuring initiatives curbed its costs to a great extent. Going forward, the company’s expenses are expected to improve owing to its planned business rejig.

Management is also addressing its challenges through operational efficiency and additional divestitures. Shedding small assets helps it focus on its core business that comprises large hospitals, which in turn, promises higher returns. The company anticipates to complete its divestiture plan by mid-2020. Given its divestitures, it expects cash flow to improve.

Surgery volumes are expected to expand in 2020. Focus on core business would likely streamline its profile further, thereby generating growth.

If the company is successful in its efforts to drive admissions, ramp up productivity and control costs, EBITDA would also increase significantly.
The Zacks Consensus Estimate for 2020 earnings suggests 7.3% growth from the year-earlier reported figure.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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