Community Health Cut At BofA, Firm Warns Of Low Visibility

• Community Health Systems CYH shares are down 50 percent year-to-date, slumping from $40 to $30 on October 21.
• BofA Merrill Lynch’s Kevin Fischbeck downgraded the rating on the company from Buy to Neutral, while reducing the price objective from $64 to $42.
• The company preannounced weak 3Q results, missing expectations, while its 4Q guidance implies a huge sequential improvement, Fischbeck mentioned.

Community Health Systems preannounced sluggish 3Q results, with EBITDA of $661 million, missing consensus expectations by 13 percent and BofA’s estimate by 19 percent.

Although the company’s volumes were strong, the miss was caused by lower margins “with every cost item increasing y/y,” analyst Kevin Fischbeck said. EBITDA margins came in at 13.6 percent, down 100bps y/y.

Community Health Systems reduced its revenue guidance for 2015 by $300 million at the midpoint, and also trimmed its EBITDA guidance by $120 million at the midpoint to $2.9-3.025 billion, as compared to the consensus estimate of $3.056 billion.

“This implies Q4 EBITDA of $819m at the midpoint, roughly in line with consensus of $823m. However, this implies a huge ($158m or 24%) sequential improvement in Q4…Investors are likely to be skeptical of the company’s ability to swiftly reduce costs and record an improvement,” Fischbeck wrote.

The EBITDA estimates for 2015, 2016 and 2017 have been reduced from $3.19bn to $2.94bn, from $3.30bn to $3.15bn and from $3.40bn to $3.25bn, respectively.

In the report BofA Merrill Lynch noted, “We continue to see value in CYH and the spin-off of Quorum, but the disappointing quarter and lack of visibility leaves us with the view that it is unlikely to outperform.”