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Why Community Health Systems Stock Is Tanking Today

By Keith Speights - Oct 30, 2019 at 11:49AM

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The hospital operator's Q3 loss and plans for a debt swap are worrying investors.

What happened

Shares of Community Health Systems (CYH -3.88%) had dropped by 13.8% as of 11:17 a.m. EDT on Wednesday. The big decline came after the hospital operator announced its third-quarter earnings results, along with an offer to exchange new senior notes for old notes, following market close on Tuesday. 

Community Health Systems reported that its Q3 revenue fell nearly 6% year over year to $3.25 billion. The company announced a net loss of $17 million, or $0.15 per share, based on generally accepted accounting principles (GAAP). This reflected an improvement from the net loss of $325 million, or $2.88 per share, posted in the prior-year period. Community Health recorded an adjusted net loss of $0.29 per share. 

The hospital chain also plans to offer a combination of $700 million in new 8% senior secured notes due in 2027 and up to $1.932 billion of 8% senior secured notes due in 2028 in exchange for its $2.632 billion worth of outstanding senior unsecured notes with a 6.875% yield, which are due in 2022.

Hospital building

Image source: Getty Images.

So what

Community Health's declining revenue and continued losses certainly don't give investors a warm and fuzzy feeling. Investors shouldn't focus too heavily on the lower year-over-year revenue, though. Community Health has completed the divestitures of 11 hospitals during the first nine months of 2019. 

The company did manage to top Wall Street revenue estimates. The consensus analysts' estimate for revenue in Q3 was $3.22 billion. On the other hand, Community Health's adjusted net loss of $0.29 came in lower than the net loss of $0.25 per share expected by analysts.  

There's also likely some concern about Community Health Systems' proposed debt swap. The company already spends 8% of its revenue on interest expense. The exchange offer floated on Tuesday would increase how much it has to pay in interest.

Now what

Community Health Systems chairman and CEO Wayne T. Smith said that the company expects "a good finish to this year and [we] believe we are well-positioned to deliver a strong performance in 2020." A big key to those plans will be to wrap up additional divestitures of hospitals. The company has entered into a definitive agreement to sell three hospitals. However, it acknowledged that "there can be no assurance" that potential future divestitures or the ones covered under the definitive agreement will happen.

Investing in healthcare stocks involves plenty of uncertainty. Community Health Systems' situation underscores this point. But the company does appear to be on the right track in divesting more of its hospitals. In the meantime, though, investors are probably better off watching this stock from the sidelines.

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Community Health Systems, Inc. Stock Quote
Community Health Systems, Inc.
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