February 5, 2009 - Community Health Systems (CYH-NYSE) provides healthcare services through operation of hospitals in the United States. The company offers a range of general and specialized hospital healthcare services, including general acute care services, emergency room services, general and specialty surgery, critical care, internal medicine, obstetrics, and diagnostic services.

The niche where Community thrives is serving non-urban areas in the U.S. It's the largest in terms of facilities and second in revenues. While the stock cratered at the end of last year (going to $10. 50 from $40 earlier in the year), it's rebounded and seems to be positioned for better growth.

Earnings in the first quarter jumped by 21%, mostly due to an increase in outpatient surgery. They were strong enough to offset a small decline in overall admissions. On the negative side: consolidated bad debt went up by 80 basis points, year over year, to 11.6% of revenues.

Here's what one Deutsche Bank analyst had to say about the acute care industry: Darren Lehrich upgraded his outlook for acute care hospitals on June 1, citing the prospects for health care reform, better industrywide expense control, and a slowdown in bad debt growth.

"Despite recent strength in hospital stocks, we believe the sector still has compelling upside from current levels," he said, citing better efforts at controlling labor costs and a relatively stable mix of patients and income. The latter has helped mitigate bad debt, which is the amount of debt a hospital incurs from treating uninsured or underinsured patients and has been unable to collect.

"One critical component of our sector upgrade relates to our belief that traditional fundamental investors may become drawn to the sector based on the secular theme of health care reform," he said. The ultimate outcome of any reforms, including near-universal health coverage, should benefit the hospital industry, he said. He expects major legislation on the issue this year.

Still, one of the biggest risks for the industry remains bad debt, he said, considering the unpredictable unemployment situation and recession.

Earnings for CYH in the first quarter were 63 cents a share, up from 52 cents in 2008's first period. Next quarter 18 analysts' consensus is for 61 cents, up from 54 cents last year. For the full year, the consensus is for $2.52 (up from $2.19 in 2008) and for 2010: $2.84. Revenues are expected at $11.77 billion this year, up from $10.84 billion in 2008. Next year, analysts see $12.45 billion.

The company is growing. In the first quarter, it signed up 320 new doctors to its program, an increase of 55% from first quarter of 2008. Management is predicting 1500 new hires by the end of the year. With a focus on specialists, the new additions will help widen margins due to high end procedures.

All of this positive news hasn't been lost on investors. The stock rallied strongly from its lows, as described earlier. But there's some bad news: the company is highly leveraged with 84% of capital coming from debt. Total debt is $9.11 billion. Debt to Equity is 5.25. As long as interest rates stay low, this isn't a major concern. But with inflation seemingly inevitable because of strong spending by the government, this high debt component may be problematic, especially if credit markets stay tight.

More numbers: Market Cap is $2.29 billion. Forward P/E is 8.94. Price to Book is 1.38. Operating margin for the last 12 months was 9.01% while Profit margin was 1.97%. Total cash is $532.13 million, putting Cash per share at $5.89. Current ratio is 2.02. Book Value is $18.83. There are 90.27 million shares outstanding with a float of 87.21 million. Insiders own 6.87%. Institutions have 90.6% of the stock. There is no dividend.

CYH is worth a look, if a large debt load isn't too frightening. Some valuations are relatively attractive. PSR and forward P/E are two good examples. But the stock did take a major dip last year (as did most other stocks but this one really tanked) and has rallied almost 200% since the lows. Much of the good news seems already baked in. Dig deeper into CYH if you're looking for a strong niche player with strong earnings growth projected. Just be aware of that debt burden.

Company Web site: www.chs.net

- Ted Allrich