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Community Health Continues to Divest Units to Lower Debt

Zacks Equity Research

In its bid to divest units to lower its debt level, Community Health Systems, Inc. CYH has struck an agreement with The Health Care Authority of the City of Anniston. Per the pact, Community Health will divest a 125-bed Stringfellow Memorial Hospital in Anniston, AL to The Health Care Authority of the City of Anniston.

The company is burdened with a high level of long-term debt. It has therefore implemented portfolio rationalization and a deleveraging strategy by divesting hospitals and non-hospital businesses. Generally, these businesses are not in one of the company’s strategically beneficial service areas, are less complementary to its business strategy and have lower operating margins.  At the end of 2016, Community Health had approximately $14.8 billion of long-term debt, reflecting a decline from $16.7 billion at the end of 2015.

Despite significant divestitures and a consequent decrease in the debt level, the company has failed to gain investors’ favor. Its share price was down 43% over the past one year compared with gains of 10.9% for the Zacks categorized  Medical-Hospital industry. The stock also seems to have taken a beating from the presidential election of Donald Trump who is eager to bring in changes to Obamacare. Although nothing is final yet, the changes might have an unfavorable effect on the hospital industry and the company.

Coming back, the transaction is expected to close in the second quarter of 2017. Last month, the company signed another deal with Steward Health Care LLC to sell eight hospitals and their associated assets. This transaction will also be completed around the same time as the one that was most recently announced.

During the fourth quarter, Community Health divested many of its operating units. In Dec 2016, it inked a deal to sell two Washington hospitals, the 214-bed Yakima Regional Medical & Cardiac Center and the 63-bed Toppenish Community Hospital to Sunnyside Community Hospital & Clinics. In the same month, it completed the sale and leaseback of 10 medical office buildings for $163 million to HCP, Inc. HCP. Last November, the company signed a definitive agreement to sell Rockwood Health System and its associated assets to MultiCare Health System.

In Jan 2017, the company sold an 80% ownership interest in its Home Health division to the subsidiary of Almost Family for $128 million. The company also spinned off 38 facilities to Quorum Health Corporation QHC. The spin-off was completed in Apr 2016. Due to a number of divestitures, the number of hospitals at the end of 2016 was 155 compared with 194 at the end of 2015 and 197 at the end of 2014.

Regarding the latest transaction, we are hopeful that this would help Community Health to optimize its portfolio and operations in the future.

Community Health carries a Zacks Rank #3 (Hold). A better-placed stock from the same space is HCA Holdings Inc. HCA with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

HCA Holdings delivered positive surprises in the last four quarters with an average surprise of 10.16%.

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