Risk Should Already Be Priced In Quorum Health Shares

Morgan Stanley has started Quorum Health Corp QHC with an Equal-Weight rating and $12 price target, saying that risk is already priced in to the shares.

Quorum Health, which owns/leases a portfolio of 38 hospitals across 16 states, is a spun-off company from Community Health Systems CYH.

"We think QHC is starting in a difficult position given the composition of its current portfolio and high leverage levels but risk looks priced in. QHC will benefit from portfolio rationalization, freeing up capacity for accretive acquisitions," analyst Andrew Schenker explained.

"With QHC currently trading at ~6.0x our 2017 EBITDA estimates, versus a range of 6.5x to 8.2x for its peers, we believe the challenges are sufficiently discounted in the stock," the analyst continued.

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

According to the note, the company has its share of challenges including "weaker EBITDA margins, soft utilization, and limited exposure to economic growth."

Specifically, the analyst noted that QHC's 2015 EBITDA margins stands 12.2 percent versus the peer average of 14.9 percent and has posted the softest volumes of his coverage, including closest peer LifePoint Health Inc LPNT.

Future volumes should benefit as Quorum Health would focus on expanding physician and capital investments. In addition, Schenker said a renewed focus, room for consolidation in rural markets and Medicaid expansion should fuel growth.

"[W]hile QHC has already realized significant benefits from Medicaid expansion, reform still remains an opportunity as our analysis suggests 47% of Quorum pre-ACA cost of care to the uninsured was delivered in states that have not opted to expand," Schenker elaborated.

The analyst expects Quorum Health "to drive EBITDA growth of -3.1 percent, 1.9 percent and 1.5 percent from 2016 to 2018 before factoring potential M&A."