Raymond James Cuts Community Health, Warns QHC Spinoff Makes No Financial Sense

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Raymond James’ John W. Ransom mentioned that Community Health Systems CYH's Quorum Health Corporation When Issued QHC transaction does not appear to have any financial benefit for shareholders.

Ransom downgraded the rating on the company from Market Perform to Underperform.

The analyst believes that “there could be post-spin selling pressure for both technical reasons and for fundamental reasons.”

The Spin Makes No Financial Sense

Although spinning out non-core assets might make strategic sense, Ransom believes that the sale makes “little financial sense,” given the additional costs on Quorum, especially the meaningfully higher interest costs, would mean that the two entities would earn less separately than they did together.

Related Link: Avondale Moves To Sidelines On Community Health Systems

Ransom estimates that the pro forma net interest expense of the two entities would rise by $48 million.

In addition, the spin would lead to increase in Community Health’s already high leverage.

The analyst also pointed out that there could be “potential short-term technical pressure on QHC shares as CYH holders will inherit QHC stock with an expected market cap of <$600 million, and some of these holders will be forced to sell this paper due solely to market cap considerations.”

Estimates Revised

The 2016 revenue, EBITDA and EPS estimates have been lowered, as have the 2017 revenue, EBITDA and EPS estimates.

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Posted In: Analyst ColorShort IdeasDowngradesStock SplitAnalyst RatingsTrading IdeasJohn W. RansomQHCQuorum Health Corporation When IssuedRaymond James
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