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Glenview Buys 8.4% Of Community Health Systems

GLENVIEW CAPITALAccording to its 13F filing, Glenview Capital initiated a position of 1.6 million shares in Community Health Systems (NYSE:CYH) during the third quarter of 2012 (find more new stock picks from Glenview Capital and read our analysis of the fund’s activity). The company is a $2.7 billion market cap provider of hospital services, and in addition to its network of hospitals it also owns a number of home care and hospice agencies. Glenview, which is managed by former Omega Advisors trader Larry Robbins, has apparently kept right on buying the stock and owned 7.6 million shares in late November. The 13G which the fund filed to report his position had Glenview owning 8.4% of the shares outstanding.

Operating income in the third quarter of 2012 was about flat compared to a year ago, as revenue growth of 9% was offset by higher costs. With Community Health Systems taking a loss on early extinguishment of debt, earnings were down substantially for the quarter (though we wouldn’t expect to see the same expense in many future quarters). Considering the first three quarters of the year as a whole, operating income was up 9%; net income also increased, as operating income over the two periods was battered by special charges including the extinguishment costs this year and an impairment in 2011. According to the company revenue has been higher in all classes of payers, including Medicare and Medicaid as well as third parties and self-pay.

We’d note that, like many hospitals, Community Health Systems has substantial debt with the company’s enterprise value being $12.2 billion (in relation to the $2.7 billion market cap that we mentioned earlier). As such we think that it’s appropriate in terms of valuation to look at its EV/EBITDA multiple (which is 6.4x) in addition to the trailing P/E multiple of 12. These are fairly low multiples, which in our view reflects the company’s high debt load as well as uncertainty regarding how the federal government’s regulations will affect the health care sector in general and hospitals specifically. The stock popped about 8% on the day that the Supreme Court ruled that President Obama’s health care reform package was constitutional, much in line with other hospital stocks. At the same time, health insurer UnitedHealth Group Inc. (NYSE:UNH) was about flat for the day on high volume.

The market leader in the industry is HCA Holdings Inc (NYSE:HCA), and Glenview had been a major investor here as well with 8.4 million shares in its portfolio at the end of September. Billionaire John Paulson’s Paulson & Co. had reported owning 8 million shares (check out more of Paulson’s stock picks). HCA is also highly leveraged but is considerably larger, at a $14 billion market capitalization and $41 billion enterprise value. It is priced about even with Community Health Systems: the EV/EBITDA multiple is slightly lower, and the forward P/E multiple is slightly higher. The company has also been turning in better revenue numbers, with sales rising 11% last quarter versus a year earlier.

Other hospitals include Universal Health Services, Inc. (NYSE:UHS), Tenet Healthcare Corporation (NYSE:THC), and LifePoint Hospitals, Inc. (NASDAQ:LPNT). These stocks tend to trade at 10-11 times consensus earnings for 2013, though on an enterprise value basis they are priced right in line with the other hospitals at EV/EBITDA multiples between 6.3x and 6.5x. These three peers also showed growth in revenue and earnings in their most recent quarter compared to the same period in the previous year.

With the hospitals all priced similarly, we wonder if HCA might be a better buy than Community Health Systems. There’s a 13G from Glenview, but the same fund also has a large position in the market leader- it’s just that due to that company’s larger size, the stake isn’t as large compared to the overall market cap. Of course this is assuming that an investor is prepared to accept any political risks that come with investing in healthcare stocks. If healthcare is of interest but hospitals aren’t, check out our list of the ten healthcare stocks that hedge funds love.

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