Why Community Health Systems, Inc. Jumped 14.4% Today

News of a peer's acquisition provided a nice boost for this hospital chain's stock.

Keith Speights
Keith Speights
Jul 23, 2018 at 3:51PM
Health Care

What happened

Shares of Community Health Systems, Inc. (NYSE:CYH) were 14.4% higher as of 3:26 p.m. EDT on Monday. The hospital operator didn't have any news of its own, but investors bid up Community Health's stock price in response to another major announcement in the healthcare world. LifePoint Health (NASDAQ:LPNT) announced Monday morning that it was merging with RCCH HealthCare Partners, which is owned by Apollo Global Management.

So what

Why would Community Health Systems stock soar on merger news that doesn't directly impact the company? The LifePoint Health deal helped several hospital stocks. Investors apparently thought that an acquisition of LifePoint could improve the chances that other hospital operators, including Community Health Systems, might also be bought by a private equity firm.

Entrance to a hospital with signs pointing to emergency room and main entrance

Image source: Getty Images.

Keep in mind, though, that the situation for LifePoint Health is quite different from that of Community Health Systems. Specifically, Community Health's long-term debt totals nearly $13.9 billion, while LifePoint's debt is less than $2.9 billion.

However, there have been several deals recently with private equity firms scooping up healthcare companies to take them private. KKR & Co. bought Envision Healthcare in June. A few days later, Veritas Capital announced that it was buying healthcare technology services provider Cotiviti Holdings.

Now what

Investors shouldn't count on Community Health Systems being acquired like LifePoint Health and others. Instead, they should watch the moves that Community Health takes to improve its financial position.

The company is selling several of its hospitals to help reduce its debt. Since the end of the first quarter, Community Health has announced the sale of hospitals in Arkansas, Florida, Tennessee, and Louisiana. The hospital operator estimates that divestitures will generate around $1 billion in revenue this year.

It's not a good idea to buy Community Health Systems stock only because of a sympathetic move related to an acquisition of another hospital operator. However, the company appears to be making the right moves to position itself for success, especially by reducing its leverage and preparing for an increased focus by payers on value-based care. This is a stock to keep your eyes on for a potential turnaround, but I wouldn't say that Community Health is a stock to buy just yet.