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Source: Community Health Systems

A Supreme Court ruling that leaves Obamacare subsidies unchanged sent shares in Community Health Systems (NYSE:CYH) soaring by 13.8% in June.

Take Long View

Investors who had stayed on the sidelines ahead of the Supreme Court's ruling flocked back into Community Health Systems after the high court determined that the Federal government has legal ground to provide health insurance subsidies to people living in states relying on the federal healthcare.gov website.

If the Supreme Court had sided with plaintiffs in the King v. Burwell case, it could have resulted in the elimination of subsidies for 6.4 million people who live in the 34 states that opted against establishing their own state-run exchange.

The elimination of subsidies could have tripled enrollee health insurance premiums, causing many people to cancel their plans. In turn, Community Health Systems would have had to write off more money for care provided to the uninsured.

The Supreme Court's decision removes a major overhang and adds clarity to Community Health Systems' profitability even as it continues to digest its $3.6 billion acquisition of competitor Health Management Associates.

Because Community Health Systems' revenue totals $5.6 billion in the first quarter and its provision for bad debt already amounts to 13% of sales, stable or falling bad debt expense tied to this ruling effectively protects tens of millions of dollars in annual sales.

The Supreme Court decision also gives investors a reason to firm up their EPS estimates for next year, and if that results in upward revisions to forward earnings expectations, it could make Community Health Systems' valuation even more intriguing. Currently, Wall Street expects Community Health Systems to deliver EPS of $4.54 in 2016, which gives the company a forward P/E ratio of 13.9, which is lower than that of its peers. 

 

Todd Campbell has no position in any stocks mentioned. Todd owns the equity research firm E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.