Community Health Up 118.9% in a Year: Further Upside Left?

Community Health Systems, Inc. CYH has been in investors’ good books on the back of its strategic initiatives and cost-reduction efforts.

Shares of this currently Zacks Rank #3 (Hold) company have surged 118.9% in a year’s time, outperforming its industry’s growth of 0.5%.

The price performance looks stellar when compared to other companies’ stock movements in the same space, such as HCA Healthcare, Inc. HCA, Tenet Healthcare Corporation THC and Acadia Healthcare Company, Inc. ACHC, which have gained 7%, 44.4% and 9.8%, respectively, in the same time frame. All companies presently have the same Zacks Rank as Community Health. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Recently, the company reported second-quarter 2020 adjusted net income of 85 cents per share. The Zacks Consensus Estimate was of a loss of $1.22 per share. Results benefited from lower operating costs. The positive earnings delivery should instill investor’s confidence in the stock.

The company made investments in telehealth, which gained ample response amid the COVID-19 environment. In the second quarter, it managed to deliver more than 230,000 Telehealth visits.

Investors are impressed by the company's efforts to divest its non-core unit, which not only streamlined its business but also helped it pay off its debt. Shedding small assets helps it focus on its core business that comprises large hospitals, which in turn, promises higher returns. The company closed the divestiture of three hospitals on Jan 1, 2020. In June, it closed two hospital transactions, which helped it generate around $150 million of proceeds. The company expects the announced divestitures to generate approximately $430 million of incremental proceeds. It already executed some of its divestment plans over the last couple of years to create a solid portfolio by improving its risk profile. Given the divestitures of the company, it expects same-store metrics and cash flow to improve. In the first six months of 2020, cash flow provided by operating activities soared 545.3% year over year.

Moreover, strategic boots have played a key role in building Community Health’s growth trajectory. The company continues to acquire hospitals to expand its number of licensed beds. It generally targets hospitals that cater to relatively non-urban and suburban communities wherein management can add value through specialty medical service expansion, economies of scale, additional investment in new technology and an improved process management. All these initiatives remain a positive for investors.

The company’s restructuring initiatives lowered its costs to a great extent. Total operating costs and expenses of $5.1 billion were down 19.4% year over year in the first six months of 2020. Going forward, the company’s expenses are expected to improve further on the back of its planned business rejig.

Is the Bull Run Likely to Continue?

We expect the company to continue performing well as it steadily pursues its strategic efforts to pay down its debts and focus on its core operations.

Other factors, such as telehealth services are likely to provide the company with an extra cushion going forward.

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