Ringing the opening bell of the New York Stock Exchange one day last month, Community Health Systems heralded its rebirth as a public company and, as some see it, a renewed interest among investors in hospital companies as a group.
Despite an initially tepid response to its offering from the market in the first few days of its listing on the New York Stock Exchange June 9, CHS splashed onto the scene at a time when the future looks brighter than it has in several years for the for-profit hospital industry, analysts say.
"You're clearly seeing a rebound in the sector," says Scott Estes, a healthcare analyst specializing in rural hospital companies for Deutsche Bank Alex.Brown in New York. "The outlook is probably as strong as it's been in five years."
Stock prices of publicly traded hospital companies as a group have risen an average of 35% so far this year, Estes says.
CHS' share price in the several weeks since its IPO vacillated between the offering price of $13 per share and a high of $15.94 on June 21. That's an increase of more than 20% in less than a month.
Following a year when rural hospital companies had an especially tough time, these firms are rebounding well, Estes says. Both Province Healthcare Co. and LifePoint Hospitals, two other investor-owned rural hospital companies based in Nashville, have seen their share prices rise more than 60% so far this year.
"Rurals are trading at a premium to the rest of the companies," Estes says, referring to the hospital companies with more urban holdings.
In addition, most of them have announced acquisitions and plan to continue making more, which should lead to continued earnings growth.
Health Management Associates, Naples, Fla., another publicly traded company with primarily rural markets, and Province are on the acquisition trail, company officials say. HMA's acquisition prospects have improved as not-for-profit operators struggle belatedly to deal with federal reimbursement cuts and a credit crunch, says John Merriwether, HMA's director of financial relations.
Peter Costa, an analyst at ABN Amro in Boston, says part of the reason publicly traded hospital companies are faring well is the favorable managed-care pricing environment coupled with a more- understanding federal government willing to hold off on more reimbursement cuts and possibly even give more payment relief to the industry.
"I think the biggest risk in the sector is labor cost, and frankly I don't think there's an industry today that isn't somewhat worried about labor cost," he says.
Costa expects hospitals to rebound from their two-year slump and get back to a point where they outperform the general market, he says.
Investors who profited from hospital companies' solid performance in the early part of the 1990s are excited to have positive signals coming from Washington, says Jeffrey Villwock, an Atlanta-based healthcare investment banker with Villwock Capital Management.
"Those investors who profited from that, I think they're back in these stocks," he says.
CHS may still have a difficult road ahead, though, in convincing investors that the company will be able to provide a robust return for investors.
"It's a good IPO in a market that's rather difficult," noted Wayne Smith, CHS' president and chief executive officer, on the day the company went public.
The pricing of the stock was very aggressive, Villwock says, although it was reduced to $13 per share from $15 shortly before making its NYSE debut because of volatility in the market in the week before the offering.
CHS' stock was trading at nearly 10 times its annualized cash flow late last month, higher than HMA and Province.
"It's still a heavily leveraged company," Villwock says, noting that CHS' debt-to-cash-flow ratio exceeds 5-to-1. "They're going to have to spend a lot of their excess cash flow either paying down debt or growing this thing pretty slowly."
For the quarter ended March 31, CHS' net income sank 52% to $921,000 from $1.9 million in the year-ago quarter, while net operating revenue rose 17% to $308.7 million. For the period encompassing the past 12 months, the firm's profit margin was a negative 1.6%.
The company was acquired in 1996 and taken private by Forstmann Little & Co. Shortly before announcing its IPO, the company said it reached an agreement with the U.S. Department of Justice and HHS' inspector general to pay $31 million to settle allegations of improper billing procedures.
The company also disclosed in its prospectus that it has received federal grand jury subpoenas from the U.S. attorney's office in Little Rock, Ark., seeking documents from 88-bed Harris Hospital, in Newport, Ark., pertaining to its mammography department, although the company did not disclose the nature of the investigation. CHS also is facing at least three whistleblower lawsuits, all filed last year, that the U.S. Justice Department has either chosen not to join or not yet decided to join.
On the day of the offering, CHS' Smith said the company, which now owns 50 hospitals in 20 states, plans to acquire two to four facilities annually. The company has already committed to investing about $100 million to build four replacement hospitals as part of recent or pending acquisitions, says Larry Cash, CHS' chief financial officer.
It is unlikely there will be other hospital company IPOs this year, analysts say. One potential candidate is Iasis Healthcare, Nashville, which bought 15 hospitals in two deals last year from Tenet Healthcare Corp. and Paracelsus Healthcare Corp.