Baird Prescribes An Upgrade For Community Health As Planned Asset Sales Should Ease Leverage

Baird analyst Whit Mayo has upgraded Community Health Systems CYH to Neutral from Underperform, saying the planned asset sales should ease leverage.

Community Health is shopping 25 hospitals, 15 of which have definitive agreements to be sold and 10 of which have signed LOIs. These hospitals account for $3 billion in annual revenues and are expected to raise proceeds of $1.5 billon.

Further, an additional unknown number of hospitals representing about $800 million in annual revenues with mid-single digit margins are also anticipated to be sold.

“We’re moving to Neutral from Underperform primarily based on the material increase in planned divestitures, easing of CYH senior leverage ratios and hope that 4Q stabilization continues,” Mayo wrote in a note.

Meanwhile, the fourth-quarter results showed signs of stabilization, with EPS and revenue topping Street view.

Related Link: Community Health Systems Up 33% On Enormous Beat

The company continues to carry elevated tail-risk with $3.8 billion in unsecured debt to tackle in 2018–2020. Mayo noted that every 5 percent increase in borrowing costs equates to $150 million of incremental cash interest or nearly 100 percent of today's discretionary free cash flow.

That said, the company's SS admits declined 1.4 percent and SS AA fell 1.4 percent. SS revenues increased only 0.5 percent, the weakest quarter since second quarter 2014.

However, the analyst raised his price target to $9 from $5 and the new price target is based on 7.6x EV/EBITDA multiple applied to his 2018 estimate.

“The normal historical sector range is 7–8x, yet hospital turnarounds (THC) have commanded multiples much higher,” Mayo added.

At last check, shares of Community Health Systems fell 3.29 percent to $8.82.

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Posted In: Analyst ColorNewsUpgradesHealth CarePrice TargetAnalyst RatingsMoversTechGeneralBairdWhit Mayo
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