We maintain our Neutral rating on Health Management Associates (HMA), a leading operator of general acute care hospitals. Second-quarter fiscal 2011 earnings of 20 cents per share edged past the Zacks Consensus Estimate by a penny.
Health Management runs hospitals in select non-urban markets mostly in south eastern U.S. The company continues to emphasize its three long-standing initiatives, namely Emergency Room operations, physician recruitment and market development, which have facilitated admissions.
We are slightly relieved that bad debt may not be an area of looming concern. Overall, total uncompensated care (the sum of uninsured discounts, charity/indigent write-offs, and bad debt expense as a percentage of adjusted revenue) was on the higher side in the second quarter. The lingering level of uninsured admissions also remains a cause of concern.
Delayed care continues to raise acuity in a weak economy. In this regard, Health Management’s specialty recruitment and its market/service development are expected to drive acuity over the medium term as group hospitals become more adept at handling higher acuity patients. Also, Health Management’s deployment of modern surgical systems in its hospitals should continue to grow its surgical market share.
On the negative side, we are concerned about soft hospital industry volume trends and the company’s ability to quickly absorb hospitals. Sizeable debt remains on the balance sheet. The company’s contracts with commercial managed care organizations partially mitigate its exposure to government programs, Medicare/Medicaid.
Health Management has lifted its earnings guidance for fiscal 2011. The company now expects earnings between 76 cents and 80 cents a share versus its earlier forecast of 74 cents and 78 cents. Moreover, it expects same hospital admissions to be flat to down 2% (versus a rise of 1% to a fall of 1% earlier) for 2011.
The company has indicated its continued willingness to deploy free cash flow for acquisitions. It is an active acquirer of underperforming hospitals with a turnaround potential in high-growth markets. Health Management’s competitors, in niche markets, include Community Health Systems (CYH) and Lifepoint Hospitals (LPNT).
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