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Why Should You Hold Community Health in Your Portfolio?

Zacks Equity Research

Community Health Systems, Inc. CYH is well-poised for development on the back of its inorganic growth strategies and restructuring initiatives.

The company also flaunts a praiseworthy earnings surprise history, having outpaced the Zacks Consensus Estimate in two of the trailing four quarters, the average beat being 10.2%. This trend of successive estimate beats supports the company’s operating efficiency.

Its return on tangible equity — a profitability measure — stands at 5% against its industry's negative 25.6%.

The company is well-placed for growth, evident from its favorable VGM Score of B. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors.

Over the past many years, acquisitions have played a huge role in Community Health’s growth trajectory. The company continues to buy hospitals to expand its number of licensed beds. It generally targets hospitals that cater to relatively non-urban and suburban communities where management can add value through a specialty medical service expansion, economies of scale, additional investment in new technology and an improved process management.

In 2018, the company purchased a total of 43 physician practices. All these transactions poise the company well for growth, adding to its capabilities.

Community Health has been divesting units in an effort to de-risk its balance sheet by paying off debt with the funds generated from the asset sales. Also shedding small assets helps it focus on its core business, which in turn, promises higher returns. As part of this initiative, the company sold 30 and 11 hospitals in 2017 and 2018, respectively.

Having closed the sale of seven hospitals in the first quarter of 2019, the company now looks forward to sell off its Lebanon Tennessee Hospital in the third quarter of 2019. Considering the company’s divestiture trend, the same-store metrics and cash flow might improve along with its debt reduction.

The company has actively undertaken restrictive initiatives, which helped it lower its costs significantly over the last several quarters. It further expects to see an improved supply expense in 2019 and beyond. Going forward, the company’s expenses are likely to decline again on the back of its planned business rejig.

The long-term earnings growth rate is projected at 50.9%, above the industry’s average of 18.7%, which is an upside for the company.

However, Community Health’s revenues have been declining since 2016 due to lower admissions caused by a decreasing number of hospitals. We anticipate the top line to be adversely impacted by the rapid sale of unit that could affect the bed count and patient admissions.

Shares of this Zacks Rank #3 (Hold) company have lost 37.1% in a year's time against its industry’s growth of 6.1%.

Stocks to Consider

Investors interested in the medical sector can take a look at some better-ranked stocks like HCA Healthcare, Inc. HCA, WellCare Health Plans, Inc. WCG and Molina Healthcare, Inc MOH. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

HCA provides health care services. In the last four quarters, the company delivered average beat of 15.74%. It carries a Zacks Rank #2 (Buy).

WellCare Health offers managed care services to government-sponsored health care programs. The company has a Zacks Rank of 2 and pulled off average positive surprise of 13.52% in the preceding four quarters.

Molina offers Medicaid-related solutions to meet the health care needs of low-income families and individuals. In the trailing four quarters, the company came up with average beat of 88.17%. It sports a Zacks Rank #1 (Strong Buy).

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