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Will Community Health Bounce Back in 2018 After a Dismal 2017?

Zacks

Year 2017 was a dull one for Community Health Systems, Inc. CYH, a leading operator of general acute care hospitals in communities across the country.

What Were the Dampeners in 2017?

The company suffered from lower-than-expected volumes, payer rates, along with increased bad debt. The lower net revenue combined with increased operating expenses negatively impacted its EBITDA and EBITDA margin.

On a same-store basis, net operating revenues for the nine months ended Sep 30, 2017 decreased 0.3%. Both same-store inpatient admissions and adjusted admissions decreased 1.9% year over year for the nine months ended Sep 30, 2017.


For the first nine months of 2017, Community Health’s cash flows declined nearly 24% year over year led by the timing of payments for payroll, decline in cash received from HITECH and other decreases, including divestitures and working capital changes.

In the face of continued volume challenges and high operating costs, the reduction in guidance was disappointing. For 2017, it now expects revenues between $15.8 billion and $15.9 billion (compared with $15.85 billion and $16.05 billion projected earlier), and loss per share in the range of $1.20 to $1.30 (compared with loss of 30-40 cents expected previously).

These headwinds weighed on its stock, which lost 24% in 2017, underperforming the industry’s growth of 6.8%. Its performance compared unfavorably with other players in the same space like HCA Healthcare Inc. HCA and UnitedHealth Services Inc. UHS, which gained 18.7% and 6.6%, respectively.

Will 2018 Turn Out to be Better?

Community Health undertook a 30-hospital divestiture plan with the aim of streamlining its business and using the proceeds to repay its huge debt load.

The company is focusing on future growth and margin expansion. This includes strategies such as service line enhancements, physician practice development, incremental outpatient access points, investments in the behavioral health and post acute space, and the expansion of new transfer program initiative.

The initiatives are aimed at reducing operating expenses and increasing patient volumes. Though Community Health expects to see some progress on this front in the fourth quarter and in 2018, we remain on the sidelines til the progress is reflected in its earnings.

Estimate Revisions

The Zacks Consensus Estimate for 2018 was revised to loss of 86 cents per share from a loss of 62 cents per share in the last 60 days. This movement reflects analysts’ pessimism over the stock, which is likely to exert downward pressure on its share price going ahead.

Zacks Rank and Stocks to Consider

Community Health carries a Zacks Rank #4 (Sell).

A better-ranked stock in the healthcare sector is Centene Corp. CNC. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Centene zoomed past estimates in each of the last four quarters, with an average positive surprise of 10.6%.

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