Community Health Systems' Margin Pressures Continued In Q3

Community Health Systems CYH reported weak Q3 results, with the adjusted EBITDA of $465 million well below the consensus and estimate driven by lower margins.

Kevin Fischbeck of Bank of America Merrill Lynch maintains an Underperform rating on the company and lowered the price target from $10 to $6.

Liquidity Concerns

Community Health Systems lowered its EBITDA guidance for 2016 for the third successive quarter, from $2.400 billion–$2.550 billion to $2.200 billion–$2.275 billion.

“Given the high leverage there will likely be liquidity concerns but we see no reason why the company should not be able to renegotiate its covenants, and the asset sales should help buy time,” Fischbeck mentioned.

On the other hand, the analyst also believes that given the leverage, there continued to be meaningful downside risk to the stock valuation, since the new guidance appeared to be “somewhat aggressive.”

Continuing Margin Pressure

Fischbeck also stated that margin pressures continued during Q3, despite several expense reduction initiatives being announced in Q2.

“CYH said results were impacted by lower than expected reimbursement from state supplemental programs as well as increases in health insurance costs, costs of state supplemental programs, medical specialist fees, and implant supply costs, among other expenses,” the analyst went on to say.

The EPS estimates for 2016, 2017 and 2018 have been lowered.