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HMA Downgraded to Underperform

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On May 13, we downgraded Health Management Associates Inc. to Underperform based on its first quarter 2013 results.

On May 2, Health Management announced results for the reported quarter. Earnings per share of 13 cents matched the Zacks Consensus Estimate. However, net income at Health Management decreased 38.7% year over year to $23.1 million (or 9 cents per share).

Revenues (prior to provisioning for doubtful clients) increased about 2.2% year over year to $1,723.8 million, missing the Zacks Consensus Estimate of $1,744 million. Net revenues from same hospital decreased 1% to $1,470 million. Same hospital admissions and adjusted admissions dipped 8.8% and 5.8%, respectively, while surgeries and emergency room visits decreased 5.6% and increased 1%, respectively.

A rise in observation stay was a factor in the drop of same hospital admissions. Many hospitals in Florida are seeing heightened pressure from payers to put patients under observation. Overall observation stays moved up 14.1% year over year in the first quarter 2013.

Total uncompensated care (the sum of uninsured discounts, charity/indigent write-offs, and bad debt expense as a percentage of adjusted revenue) was on the higher side at 28.6% in first-quarter 2013, up from 26.1% in the prior-year quarter. Bad debt expense was 14% of revenues in the first quarter 2013, higher than 11.9% in the year-ago quarter.

Health Management tightened its guidance range for earnings per share from 86 cents to $1.01 to 86 cents to 95 cents for 2013.

The Zacks Consensus Estimate for 2013 has dropped 4.3% to 88 cents over the last 30 days. It has declined 6.4% to $1.03 for 2014 over the same timeframe.

We currently have a Zacks Rank #5 (Strong Sell) on Health Management.  We are more positive about Acadia Healthcare Company, Inc. (ACHC - Free Report) , which carries a Zacks Rank #2 (Buy). Intuitive Surgical, Inc. (ISRG - Free Report) and HeartWare International Inc. are two other Zacks Rank #2 (Buy) stocks, which are expected to do well.

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