Community Health Systems (CYH)
Community Health Systems (CYH) is a leading provider of non-urban healthcare services. This includes both inpatient and outpatient acute care services. CYH has a very bullish Chaikin Power Gauge rating and reports its 2nd quarter earnings after the close on Wednesday July 30th. CYH beat analyst’s estimates when they reported 1st quarter earnings in May. Consensus estimates for the current quarter are $0.34 with full year consensus estimates of $2.78 a gain of 16% over last year. The most optimistic analyst is expecting full year earnings to come in at $3.29 for 2014. Analysts expect 2015 to show $3.80 per share, a 39% increase over 2014 consensus estimates, with the highest estimate at $5.36 per share.
I would normally dismiss the highest estimates as outliers but health systems Like CYH are clearly benefiting from the Affordable Care Act and two recent reports have put the entire hospital sector in the spotlight.
On July 16 HCA Holdings (HCA), which also reports this week, raised their 2nd quarter guidance substantially for both revenue and earnings per share. They also guided higher for the full year 2014. They raised estimates for the quarter 16% from $0.92 to $1.05 and for the full year from $4.00 - $4.25 vs. consensus estimates of $3.71. This significant raising of guidance by HCA’s management acknowledged that their results exceeded both core operations projections and the benefits to HCA of health care reform.
The news from HCA had a positive effect on the whole industry group, with CYH up 9.2% that day to a new 9 month high of 47.60, while Tenet Healthcare Corp. (THC) was up 6.4%. Community Health then pulled back to support at 42.93 but Friday lightning struck again.
LifePoint Hospitals Inc. (LPNT) reported blow out earnings, beatings estimates by 50% while raising its outlook for the full year. Much credit was given to their ability to garner additional business from sign-ups via the Affordable Care Act. LPNT was up 16% before settling back to a 7% gain on a down day in the stock market. More importantly, LifePoint’s earnings report had a ripple effect in the hospital management group with institutional investors putting money to work across the whole industry group.
Community Health System once again spiked up to a new 9 month high of 48.34 and closed at 47.49. This second confirmation of the salutary effect of the Affordable Care Act on hospital management companies leads us to conclude that CYH’s earnings report on Wednesday after the close may exceed analyst estimates and cause the stock to spike up once again, this time besting bull market highs of 51.29 established in June 2013.
With the wind at its back in terms of group and sector strength, and the Affordable Care Act as an additional stimulus, CYH looks like an attractive buy ahead of Wednesday’s earnings report.
Community Health Systems’s very bullish Chaikin Power Gauge rating
is driven by very bullish price/volume activity as well as increasingly bullish analyst ratings and insider buying. CYH is in the very strong Medical Care group which in turn is in the strong Health Care Sector (see XLV
ETF). The company has a record of consistent earnings growth and a relatively low projected price/earnings ratio of 17x. Financial metrics such as Price to Book, Free Cash Flow and Price to Sales are also very positive.
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