Analysts' Choice: Our Prescription? Community Health

7/30/2015


  Recent Price
$62
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
16
  Shares (millions)
115
  Long-Term Debt As % Of Capital
78%
  52-Week Price Range
$65.00 - $42.29

With the S&P 1500 Index flat-lining this year, Community Health Systems ($62; CYH) may be the remedy for investors trying to resuscitate portfolios. According to Community Health, U.S. spending on hospital services should average 6.2% annual growth through 2023, exceeding the broad health-care sector's growth of 5.6%.

The Congressional Budget Office expects enrollment on health-care exchanges, estimated at 12 million this year, to reach 21 million in 2016. That target seems more feasible following the Supreme Court's decision to support federal tax subsidies in the 34 states that rely on federally run health exchanges. About three-fourths of Community Health's hospitals are in states that use federal exchanges.

The stock has rallied 13% since the Supreme Court's ruling but trades at 16 times trailing earnings, in line with its 10-year average and 29% below the industry median. Community Health is a Buy and a Long-Term Buy.

ACA tailwind

The Affordable Care Act has increased the number of paying patients in the U.S., reflecting the expansion of Medicaid and insurance purchased on health exchanges. Not only does ACA reduce hospitals' exposure to uncollectable billings, it also boosts demand for services, as the insured are more likely to seek care. Community Health's adjusted same-store admissions, which combine inpatient and outpatient volumes, rose 2.5% in the March quarter and 2.7% in the December 2014 quarter — the first growth since the December 2012 quarter.

The company operates 199 hospitals in 29 states, with its biggest presence in Florida (13% of hospitals, 13% of 2014 revenue), Pennsylvania (10%, 12%), Texas, (9%, 10%), Indiana (5%, 8%), and Tennessee (10%, 7%). Community Health has acquired 169 hospitals since 1997, including 75 last year, primarily through the $7.3 billion purchase of Health Management Associates. The company prefers expanding in rural or suburban areas, which tend to face less competition.

Reduced uncertainty over ACA and consolidation in the health-insurance industry likely clears the path for more hospital deals. Given its size (Community Health ranks third among S&P 1500 hospitals by stock-market value and second by sales), the company is more likely to be an acquirer than a takeover target.

The balance sheet is heavily leveraged, with long-term debt totaling $16.74 billion, versus just $222 million in cash. But none of that debt comes due before 2017, and Community Health generates enough cash to service its debt load. In the 12 months ended March, cash from operations rose 36% to $1.49 billion, while interest expense was $989 million.

Conclusion

Analysts expect per-share-profit growth of 20% in the June quarter (results to be released Aug. 3). Earnings per share are expected to climb 22% this year and 14% in 2016. Looking further out, Community Health operates in 15 states that haven't expanded their Medicaid programs. Profits could surprise to the upside if some of those states change their tune.

An annual report for Community Health Systems is available at 4000 Meridian Blvd., Franklin, TN 37067; (615) 465-7000; www.chs.net.

COMMUNITY HEALTH SYSTEMS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '15
0.85
vs.
0.29
18%
56.44
-
45.51
17 - 14
Dec '14
1.23
vs.
0.55
15%
57.46
-
44.74
22 - 17
Sep '14
1.00
vs.
0.79
50%
57.72
-
42.05
24 - 18
Jun '14
0.74
vs.
0.38
50%
46.66
-
34.55
23 - 17
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
18.64
3.29
0.00
57.72
-
34.55
18 - 11
2013
13.00
2.62
0.00
51.29
-
30.85
20 - 12
2012
12.95
3.55
0.00
32.70
-
16.37
9 - 5
2011
13.63
3.33
0.00
42.50
-
14.61
13 - 4
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
83
79
83
50
29
29
89

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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