CYH - Community Health Systems

[Steven B]

Hi All,

 

Has anyone seen/know of a short thesis on CYH? Looks extremely cheap to me and I'm I want to see the other side of the coin. It looks like a real "ick" Michael Burry type of investment. Yes, there's a ton of debt. Yes they've have problems the last few quarters. Still very very cheap. I hope to post a longer pitch soon, but was just wondering if there anyone knew of a short thesis on it.

 

Thanks in advance.

[Guest roark33]

Not sure if you mentioned Burry because of this, but Burry is actually invested in this company, or was as of 12.31.15.  Check his 13-F, Scion Asset. 

[karthikpm]

CYH is trying to split into two companies - Quorum and CHS - CHS will remain a group of the larger hospitals, quorum will be a collection of the smaller hospitals.

With significant change in reimbursement ,new payment models and ACOs a lot of the hospital chains ( and other inpatient service providers) could see their earnings permanently impaired.  The debt then becomes a big issue.  However, only the large chains will be left as this landscape plays out.. So the short term ( 3-5 yrs)  looks worrisome , but the longer term may be OK

[Steven B]

Thanks Roark, Burry was just posted on Dataroma, so I saw it, I got a laugh out of it.

 

As far as changes to reimbursements and ACOs, there's no question that changes are coming but I think they are slightly overblown and it's very cheap. I attached a little summary of the thesis if you want to check it out. Thanks for the feedback.

Summary_of_Thesis-CYH.docx

Summary_of_Thesis-CYH.docx

[dorsiacapital]

Yeah, I'm also quite intrigued by it. I posted my thoughts in another thread on Burry. Cut and pasted below. I think we should start an official investment idea thread.

 

I think my major concern is that the business has struggled quite a bit over the last year, missed estimate by a lot.  They've also got some problems with bad debt, and I wonder if there are concerns that the problem has not been addressed by the last set of writeoffs. Would be curious to hear more about the changes in reimbursement/payment models.

 

I would actually think that there is the possibility of a very significant positive long term trend - increasing medicaid coverage as states slowly, slowly, slowly take that Obamacare money.  CYH is disproportionately in states that have not yet accepted the trend.

 

As is perhaps typical of Burry investments, I don't think that this is one to make a core part of the portfolio for the next 10 years (http://y0ungmoney.blogspot.com/2014/06/value-or-mean-reversion.html) - I think this is more of a mean reversion than anything else. If it gets to 40-45 ish I would sell out because the debt does worry me. But not everything has to be Coca Cola in 1989.

 

---

 

So Community Health is kind of a piece of crap, and management badly missed their targets.  They also are deeply in love with adjusted ebitda as a metric, but of course the adjustments never include their very high annual capex needs.

 

But, here's my very rough breakdown -

 

They currently have an enterprise value of 19 billion, which is 2 billion of equity and 17 billion of debt. Their adjusted ebitda last year was 2.8 billion.  Their actual cash flow from operations was about 1.05 billion last year, and they had capex spend of about 950 million - so real cash flow of about 100 million. Not great! But, they did have 1.8 billion of cash flow from operations in 2014, and they had a sort of kitchen sink year last year with writing off delinquent accounts and various other problems. They're forecasting ebitda improvements of about 500 million this year. Who knows if that will come through.

 

But I'm particularly interested because they are spinning off a small group of rural hospitals called Quorum in late April. Quorum has They delayed a bit when the HY market seized up, but they finally got the funding.  Quorum has proforma adjusted ebitda of about 237 million.  They're loading it with 1.2 billion of debt.  If Quorum trades with an 8 ev/ebitda, then Quorum will have an equity value of about 400 million.  Meanwhile CYH is getting 1.2 billion in cash. They've said that they'll use it for debt repayment.  If they do, then that should lower their interest costs by about 100 million a year.  Quorum's CFO was about 40 million a year, so that should add 60 million to cash flow from operations.  Their cash flow from operations is then up to 150 million without any improvements. If you believe that they can even add another 50 million of cash flow from operations through 2016 improvements, then they'll have a 200 million dollar free cash flow for the equity stub.  At that point, it seems reasonable that Community Health equity should be worth 2 billion (at a 10% fcf yield) and Quorum should be worth 400 million, which is about 20% higher than today.  At that point, if they are successful on any of their various synergies, the equity stub that is CYH should increase in value quite quickly (it was trading at 60 early in 2015 and is now at 18).  For example, pre 2015, the cash flow from operations from CYH/HMA (their 2014 merger) were consistently above 1.5 billion, with capex in the 1-1.1 billion range. If they can get back to that, then the free cash flow should be about 400 million, the equity stub should be worth 4 billion, which would make CYH a double.

 

 

There's also at least one nice long term trend. Community Health's biggest problem is self payers. Currently, only 43% of their patients are in states with medicaid expansion access (they're primarily located in southern states), but slowly, slowly, republican states are becoming more willing to accept medicaid.  (i.e. even Alabama is taking it more seriously - http://www.montgomeryadvertiser.com/story/news/politics/southunionstreet/2015/11/14/medicaid-expansion-alabama-next-big-battle/75738568/)

 

And 2016, a presidential year with presidential turnout, could make state legislatures, like Florida, quite a bit more blue.

 

Here's a decent, albeit promotional presentation, from last Q - http://www.chs.net/wp-content/uploads/2016/02/Q4-2015-Investor-Presentation.pdf. I do like that they're relatively honest about CFO / capex even with all the ebitda talk.

 

I think the LEAPS options provide some very nice potential - the 2018 25s are at a mark of about 2.70.

 

 

 

 

[Steven B]

Dorsia,

 

Thanks for the insight. I'd argue that while I do believe the overall company and industry is not somewhere I see huge compounders, I see this as a step up from the "mean-reversion" plays referenced in the other article.

 

First of all, with regards to the past years performance, there were actually improvements operationally  in the 4th quarter that were completely obscured by the change in bad debt estimate write-offs. While you never know, management had all the incentive in the world to put out all the bad news at one time, the share price had already been slaughtered to a great degree at that point. Additionally, they have guided the run rate for the change to be only $20M per annum. I'm not saying take their word, but I'm inclined to believe it will be in that ballpark considering they had plenty of motivation to get the bad news out of the way.

 

Second of all one could make the argument that FCF is really much higher than the cash flow from operations number. They had an enormous decrease in accounts payable that management addressed in the CCs, among other things. Just because they don't get paid the extra 200M from '15 until 1Q '16 doesn't mean I wouldn't consider that FCF from '15. If you take Net income add, back D and A (without all the other non-cash), subtract Mait. CAPEX and distributions for non-controlling etc. you get around $380M of FCF selling for 2B. So you're really looking at a cheap company before you factor in all the other possible enhancements.

 

That being said, again it's not a great company and the leverage does bother me. All in all, it's still just so cheap.

 

Dorsia, thanks for the suggestion to move the thread over.

[dorsiacapital]

I am concerned that the (bottom?) tranche of the Quorum debt priced at 11.625 percent  (http://www.nashvillepost.com/business/area-stocks/article/20493167/quorum-prices-big-debt-offering)

 

Does make me wonder just how much value the Quorum equity stub will have at that level of debt pricing. Still even if Quorum goes bust, the 1.2 billion in cash for Community Health will be helpful. Will be curious where the quorum stub starts trading...

[Steven B]

For those who have a cloner bent, Burry sold out of his position and Tepper increased his 600% making it 3% overall of his portfolio. According to his informal guidelines from the old days that he sells when a  stock bouncing around the new lows breaks support, this makes sense. Not saying that's his reasoning, for all I know he feels he made a mistake, just throwing it out there.

[sampr01]

anyone interested now $5 (-50% drop) ???

[jrallen81]

I'm interested in that time machine that lets me take back last week.

[solobz]

could be a zero. some of the senior debt maintenance covenants go to 4x leverage and 2.25x coverage at end of year... CYH will likely be sitting at around 3.9x, 2.3x end of year and need some amendments.. not a great situation. I own the 2022 sr. unsecured...off 7 points to 90ish today. wouldn't buy them today. not sure what I'll do with them yet.

[Steven B]

Interesting. I'm getting a front row seat to the horrors of leverage. Do you know which debt that was on? Is it mentioned in the recent filings?