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Why did Community Health Stock Sink More Than 50% in a Year?

Zacks Equity Research

Community Health Systems, Inc. CYH  has been losing out on investors’ confidence due to the stock’s persistently poor performance in comparison to the industry as well as its peers. The company’s lower-than-expected volumes, payer rates, increased bad debt, a weak top line combined with higher operating expenses leading to a further drag in the margin have likely caused this underperformance.

In a year’s time, shares of Community Health have tanked 50.5%, underperforming the industry’s rally of 10.7%. The company’s performance pales even more when compared with other hospital stocks like HCA Holdings, Inc HCA and Tenet Healthcare Corporation THC, which have jumped 22% and 48%, respectively, over the same time frame.

 

What’s Causing the Underperformance?

Lower Revenues: This leading operator of general acute care hospitals in communities across the country has been witnessing a downward trend in its top line since 2016 on lower admissions, stemming from decreasing number of hospitals as a result of frequent divestitures. In both 2016 and 2017, revenues declined by 5.1% and 16.7%, respectively. Rapid sale of units might have further induced reduction in the bed count and patient admissions. Besides these, the company bore the brunt of falling payer rates and increased bad debt.

Higher Expenses: Community Health has been enduring continuous escalation in operating expenses for many years now. Although in 2017, operating expense declined 10%, it represents 112% of the total revenues while in 2016, the same accounted for 104% of the metric. Mounting costs combined with dull revenues  have impelled the company’s disappointing performance with a loss report in the past three consecutive quarters, adversely impacting shareholders’ expectation from the stock.

Tepid 2018 Guidance: Following discouraging 2017 results, Community Health has issued guidance for 2018, comparing unfavorably with 2017. Loss from continuing operations per share is expected within $1.50-$1.10 with the mid-point wider than the adjusted loss of $1.20 incurred in 2017. The company expects net operating revenues in the range of $13.6-$13.9 billion, reflecting a 10% drop from $15.35 billion generated in 2017.

Does 2018 Look Promising?

Community Health is focusing on future growth and margin expansion. The company adopts strategies like service line enhancements, physician practice development, incremental outpatient access points, investments in the behavioral health and post-acute care space plus the expansion of new transfer program initiative.

Although the company anticipates trimming its expenses and improving volumes through these measures, we remain on the sidelines till any progress is reflceted in its earnings.

Estimate Revisions

The Zacks Consensus Estimate for 2018 was revised to a loss of $1.31 per share from a loss of 78 cents in the last 60 days. This movement reflects analysts’ pessimism on the stock, which is likely to exert a downward pressure on its share price going forward.

Zacks Rank & Stock to Consider

Community Health holds a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A better-ranked stock from the hospital space is Universal Health Systems, Inc. UHS with a Zacks Rank #2 (Buy). The company’s earnings have outperformed expectations in two of the last four quarters with an average beat of 0.21%.

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Universal Health Services, Inc. (UHS) : Free Stock Analysis Report
 
Tenet Healthcare Corporation (THC) : Free Stock Analysis Report
 
Community Health Systems, Inc. (CYH) : Free Stock Analysis Report
 
HCA Healthcare, Inc. (HCA) : Free Stock Analysis Report
 
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Zacks Investment Research