Community Health Systems, Inc. (CYH) operates 155 hospitals across numerous states with over 800,000 patient admissions annually. The business has changed fundamentally over the years as it acquired, sold and spun off hospitals in large and small blocks. However, the underlying business generally has limited volatility. Demand for acute healthcare services tends to be relatively stable, with limited growth potential. Despite this fact, the stock has fluctuated, potentially creating opportunities for investors.
The company's revenues have moved largely due to the changing number of hospitals in the system. Acquisitions propelled the top line higher in 2014, and the 2016 spin-off of Quorum Health Corporation (QHC) caused a decline. Otherwise, revenues are largely constrained by demographic trends and billings. Analysts expect Community Health Systems' top line to decline by 6.5 percent in 2018, so the company's struggles to maintain its revenues are likely to continue. The company has disproportionate exposure to states that have not expanded Medicaid, which has kept it from realizing some of the same gains as its peers. (See also: Community Health Systems Q1 Earnings Beat Estimates.)
Expense minimization and cash flow management are two of the most important factors for operational success in the hospital industry. Community Health Systems has generally reported narrow margins, which are common in the industry. The company's trailing-10-year average net margin is 1.37 percent, which is 74 basis points below its current peer group average. Community Health Systems has experienced adjusted margin degradation since 2012, a worrisome trend given the importance of expense mitigation. (See also: Community Health Completes Tender Offer for Senior Notes.)
The company incurred large impairment charges related to the Quorum spin-off in 2016, which severely affected GAAP profits but not cash flow. Community Health Systems has delivered positive free cash flow in every year of the past decade except for 2015, although recent periods have failed to meet prior highs. (See also: Impairment Charges: The Good, the Bad and the Ugly.)
Cash flow has been positively affected by Community Health Systems' working capital management. The company's days sales outstanding (DSO) rose significantly from 2009 to 2010, but that figure has been largely steady since that time, indicating stable receivables collection performance. The company's payables period expanded much more rapidly than days sales outstanding, although payables have been reined in since the 2013 high. Optimal working capital management generally means that a company will have longer payback times than collection times, but excessively high payable periods can also harm perceived creditworthiness or supplier relationships. Community Health Systems has also experienced a general downward trend in asset turnover since 2011, indicating that the company is using its assets less efficiently to generate revenue. Its current asset turnover ratio of 0.74 lags the peer group average of 0.93. (See also: Why Is Working Capital Management Important to a Company?)
Community Health Systems' financial health is an area of concern for investors. The company has ample liquidity, with a current ratio of 1.59 that is right in line with its peer median and its own trailing-10-year average. However, the company has very high financial leverage after taking on significant debt to finance a 2014 acquisition before losing significant shareholder equity in the Quorum spin-off. Community's equity multiplier currently sits at 15.16, far above the peer group average of 6.24, which itself is high relative to many other industries. High financial leverage increases the risk for equityholders in the event of liquidation. (See also: How Does the Equity Multiplier Change in Relation to Asset Turnover?)
Community Health Systems is priced at a discount relative to peers. It trades below book value, has a forward price-to-earnings ratio of 11.4 and a price-to-free-cash-flow ratio of only 2.8. While this might look like great value in a relatively recession-proof industry to many investors, the price reflects risks related to its high leverage. Some bullish investors also view Community Health Systems as an opportunity to benefit from a likely future acquisition by a larger hospital system, which would usually be priced at a significant premium to market prices. However, the high leverage will complicate the likelihood of a total buyout being struck successfully. Moreover, such event-driven strategies rely on substantial speculation and are generally not advisable for non-professional individual investors. (See also: Hospital Stocks' Fading Rally Reveals List of Ills.)