What to Look for in Community Health Systems’ Fourth Quarter Report

As Community Health Systems reports fiscal 2013 fourth quarter earnings later today, investors should look for updates on the following key areas.

Feb 18, 2014 at 1:49PM

As Community Health Systems (NYSE:CYH) closes out its fiscal year and reports on the last quarter of 2013, investors should consider any new developments that affected the following areas during the fourth quarter. The hospital operator currently owns, leases, or operates 206 hospitals in 29 states and has a market cap of $3.9 billion. With a P/E ratio of 11.81, Community Health' s stock is cheaper than its $2.5 billion rival LifePoint Hospitals (NASDAQ:LPNT). However, Community's PEG ratio of 1.49 is much lower than LifePoint's and may reflect the impact of the following factors:

1. Acquisitions and higher debt levels 
Like its competitors LifePoint Hospitals and HCA Holdings (NYSE:HCA), Community Health Systems has been focused on expanding its network of hospitals. The company operates in mostly non-urban and mid-sized markets with little competition, giving it some protection from a larger player like HCA, which is working at becoming the hospital of choice in the markets it serves.

One of the latest major additions to the Community Health network was the acquisition of Health Management Associates, or HMA, and its 71 hospitals, which increases the number of hospitals under the Community Health umbrella to its current number of 206. Community Health also gained access to patients in a variety of additional small communities with the purchase of HMA, so the acquisition is consistent with Community Health's earnings strategy thus far.

The purchase of HMA, which closed in January, has meant an assumption of debt valued at $3.7 billion. This is in addition to the almost $10 billion in debt reported by Community Health in fiscal 2013's third quarter, which should make investors somewhat nervous about Community Health's highly leveraged business. Community's cash balance as of 2013's third quarter was $144 million. In comparison, LifePoint, which has also been making acquisitions, has debt levels of $1.8 billion and a cash balance of $195 million.

2. Lower admissions and patient volume
During 2012, a severe flu season resulted in higher admission rates at many hospitals, including Community Health. Fast forward to third quarter 2013, and a softer flu season led to a significant drop in admissions. The hospital's consolidated and same-hospital operating results for fiscal 2013's third quarter reflect a 6.8% decrease in total admissions and 3.9% decrease in total adjusted admissions compared to the prior period's third quarter. Adjusted EBITDA declined to $375 million, a 21.4% drop from 2012's third quarter.

Community Health estimates that 75% of the decline in admissions was due to lower levels of patient care and readmissions related to the flu and other cardiology events. In comparison, larger player HCA also experienced softer patient volumes versus 2012, which was offset by its greater service offerings that brought in patients with higher level of care needs. HCA, which already reported its year-end results, showed growth in EBITDA of 6.7%, reflecting higher revenue per equivalent admission and sound management of expenses .

Continued slow growth in the economy and a shift to more patient services rendered on an outpatient basis is also impacting admission rates and patient volumes. Some of these lower volumes may be offset in the coming months as Community Health integrates its operations with its acquired facilities and as the newly insured under the Affordable Care Act start trickling in.

My Foolish conclusion
I would advise investors to watch Community Health Systems for signs on how its acquisition is impacting operations and how the company is managing its higher debt levels going forward. The HMA acquisition should expand the health care provider's geographic reach and bring in more patients, but longer-term growth may be limited due to the high debt on its books.

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