Shares of Community Health Systems, Inc. (NYSE: CYH) were down 12.4% as of 11:29 a.m. EDT today following the hospital operator's announcement of third-quarter earnings results after the market closed on Monday. Community Health Systems missed Wall Street earnings estimates by a mile, reporting an adjusted net loss of $1.64 compared to analysts' consensus expectation of a net loss of $1.02.
Investors typically shouldn't be too bothered if a company misses what Wall Street analysts were expecting in a given quarter. It's much more important to focus on the long-term prospects and how the company is positioned to capitalize on them.
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The bad news for Community Health Systems is easy to find. Both the top and bottom lines are deteriorating. Admissions are falling. The hospital operator's balance sheet doesn't look great, with total long-term debt of more than $13.5 billion.
However, despite the dismal Q3 performance, there were some positive signs in Community Health Systems' results. The company's revenue dropped 5.9% from the prior-year period to $3.45 billion primarily because it sold 15 hospitals. Net operating revenue per hospital actually increased 2.3% year over year. The company also reduced its long-term debt by $345 million from the same quarter of 2017.
Community Health's admissions numbers didn't look nearly as bad when taking into account its divestitures, either. Total admissions fell 12.4% below the prior-year period, with adjusted admissions down 12.2%. However, on a "same-store" basis, total admissions dropped only 2.3% and adjusted admissions were down only 0.8% from the prior-year period.
What's the main thing to watch with Community Health Systems now? More divestitures.
The company has entered into agreements to sell five more hospitals on top of the nine hospitals sold so far in 2018. Community Health also stated that it "continues to receive interest from potential acquirers for certain of its hospitals."
These divestitures are important for Community Health Systems to reduce its debt and improve its financial position. CEO Wayne T. Smith said, "We believe our overall performance will continue to improve as we complete additional divestitures and direct our investments into markets where we have the greatest opportunities for growth." His take is probably right. Paring down the business to the most profitable markets makes sense.
Earlier this year, investors became excited over hopes that Community Health could be acquired like one of its peers was. While this remains a possibility, it's likely only a remote one. For now, Community Health will have to make a comeback by executing on its strategy. While the third quarter was certainly disappointing, the company's divestiture strategy still appears to be the right path to take.
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