HMA Still Neutral


We reiterate our Neutral recommendation on Health Management Associates (HMA). Fourth-quarter 2011 earnings per share beat the Zacks Consensus Estimate.

Health Management runs hospitals in select non-urban markets mostly in south eastern U.S. The company continues to emphasize its three long-standing initiatives, namely Emergency Room operations, physician recruitment and market development, which have facilitated admissions.

Health Management shares may offer upside potential as the company’s operating turnaround begins to improve margins. Higher EBITDA growth has traditionally been a key goal for management.  Health Management expects EBITDA margins to improve in future with initiatives to grow revenue, gain higher yield managed care contracts and foster better performance of employed physicians.

We are relieved that bad debt is no longer an area of looming concern. We expect Health Management’s bad debt expense to be restrained in fiscal 2012.

The company has indicated its willingness to deploy free cash flow for acquisitions. The company remains keen to undertake acquisitions. It purchased Wuesthoff Health System in 2010. In July 2011, Health Management acquired assets of Mercy Health Partners (a subsidiary of Catholic Health Partners) based in east Tennessee. In February 2012, a subsidiary of the company inked a definitive agreement with Integris Health for a joint venture deal involving five hospitals in Oklahoma.

On the negative side, we are concerned about soft same hospital admissions in the concerned markets and the company’s ability to quickly absorb hospitals. Sizeable debt remains on the balance sheet. The company’s contracts with commercial managed care organizations partially mitigate its exposure to government programs, Medicare/Medicaid.  

We remain concerned about the high debt levels of the company. However, Health Management derives certain free cash flow conferring it with sufficient debt servicing capability, for its category.  

Health Management’s competitors, in niche markets, include Community Health Systems (CYH) and LifepointHospitals (LPNT). Our Neutral recommendation is supported by a short-term Zacks #3 Rank (Hold).

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