Leerink Downgrades Community Health Systems, Sees Challenges Coming

• Community Health Systems CYH shares have been declining steadily in 2015 and are down 49 percent year-to-date.
• Leerink’s Ana Gupte downgraded the rating on the company from Outperform to Market Perform, while reducing the price target from $75 to $33.
• Weaker volumes, payor mix and salary cost pressures are expected to persist in 2016 and 2017, Gupte stated.

Community Health Systems preannounced disappointing 3Q results, with both revenues and EBITDA falling short of expectations. The miss is attributable to weaker-than-expected payor mix, evident in slower-than-expected unit pricing growth, and higher-than-expected labor costs due to increase in employed physicians.

A higher supplies expense ratio, mainly from drug pricing and other operating expenses, also contributed to Community Health Systems’ weak performance. Analyst Ana Gupte expects weaker volumes, payor mix and salary cost pressures to persist through 2016 and 2017.

Gupte believes that the spinout of Quorum would not have a meaningful impact, and operational challenges, weak fundamentals and high leverage would remain concern areas.

The revenue and EBITDA estimates for FY15 have been reduced from $20.0 billion to $19.6 billion and from $3,101 million to $2,906 million, respectively. The EPS estimates for 2015 and 2016 have been reduced from $4.13 to $3.38 and from $4.74 to $3.20, respectively.